Is 3M Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does 3M fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell 3M's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at 3M's key statistics.


MMM Total Return Price Chart

MMM Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

19.2%

Fail

Improving profit margin

(4.7%)

Fail

Free cash flow growth > Net income growth

(1%) vs. 13.6%

Fail

Improving EPS

16.3%

Pass

Stock growth (+ 15%) < EPS growth

59.7% vs. 16.3%

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

MMM Return on Equity Chart

MMM Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(16.5%)

Fail

Declining debt to equity

(27.9%)

Pass

Dividend growth > 25%

21%

Fail

Free cash flow payout ratio < 50%

40.5%

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
3M doesn't quite come through with flawless performance, as it's only earned three out of nine possible passing grades. The combination of flat free cash flow and underwhelming earnings growth have damaged 3M in our tests, but these don't have to be fatal wounds. Will 3M be able to turn this weakness around and rebound, or is the company going to have to settle for a below-average score for the foreseeable future? Let's dig a little deeper to find out.

3M's latest quarterly report gave investors revenue that was a shade below analyst predictions. Management blames poor economic conditions for the sluggish revenue growth, but they expect increased demand during the second half of 2013. The company will try to leverage lower-cost operations in China to expand its net margins. 3M's presence in the developing markets also makes it attractive for long-term investors. Revenues from mature markets have been shrinking, but 3M has identified opportunities in its health-care and consumer segments. At present, 3M's health care segment only pulls in 21% of its revenue from developing markets. That's about $1.1 billion -- a number that should be quite possible for 3M to double over the next few years.

3M has quietly developed some world-beating RFID technology, which could give the company a leg up in the nascent Internet of Things -- or at least provide it with a new avenue of growth in connected warehouses and shopping centers. Another of 3M's innovative new products is an LED light bulb with a 25-year lifespan. These two products aren't enough on their own to push 3M into the future, so the company has also committed between $1 billion and $2 billion per year for mergers and acquisitions to boost-up organic revenue.

Putting the pieces together
Today, 3M has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article Is 3M Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends 3M. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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