Is This Dow Darling the Perfect Buy and Hold?

While some US companies are crying about the global economic outlook, others like 3M (NYSE:MMM) are buying.  On October 1st 2012 3M acquired industrial ceramics company Ceradyne Inc. (NASDAQ:CRDN) with an $860 million dollar price tag some analysts found a bit on the high side.  3M management remains committed to a long-range goal of between $1 and $2 billion a year in acquisitions.  They are still looking to acquire the office products division of Avery-Dennison Corp. (NYSE:AVY).

3M has reaffirmed its positive guidance for 2012 and analysts at Jefferies & Co. recently raised its target price on MMM, at the same time lowering its earnings estimates.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

So is dividend aristocrat MMM going forward a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

As a highly diversified globally focused conglomerate, 3M markets a product line of more than 50k products to over 200 countries.  They sell consumer products like adhesives and medical supplies and business products like industrial chemicals and adhesives, office supplies, medical and dental equipment, fire protection products, insulation products, and more.

The most obvious catalyst is positive indicators of improving macroeconomic conditions.  History already tells us the second catalyst – major acquisitions. The share price showed a modest jump in reaction to the Ceradyne deal.

H = High Quality Pipeline

Check a web definition of innovation and you might find the 3M logo on the page.  Although best known to the average investor for its consumer products like Scotch Tape and Post –It Notes, the company only derives about 14% of its revenue from consumer goods and householdoffice products.  The lions share comes from the industrial chemicals and adhesives division – 33.5% in 2011.  Did you know 3M Polyurethane Protective Tapes are now a major component in aircraft manufacturing?  3M reportedly averages approximately 20 new product launches every week.  Even during the devastating year of 2009, former 3M CEO George Buckley touted the fact the company launched over 1,000 new products in that awful year.

E = Equity to Debt Ratio is Close to Zero

3M’s debt to equity ratio is a respectable 0.38 with $6.4 billion in total debt and $4.9 billion total cash on hand. A current ratio of 2.47 and levered free cash flow of $3.95 billion support the narrative that 3M is in a strong financial position.

A = A-Level Management Runs the Company

Excellent management is not afraid to make dramatic changes and 3M’s recent announcement of a major restructuring in its operating divisions and enhanced executive leadership roles is solid eveident of A level management at 3M.

T = Technicals on the Stock Chart are Strong

As of October 2nd 2012 the stock price is 0.93% above its 20 Day Simple Moving Average, or SMA; 1.78% above the 50 Day SMA; and 7.44% above the 200 Day SMA.  In mid-May the share price crossed above all three averages and has remained above with the exception of a few days in mid-September when the price dropped below the 20 day SMA.  If you are a fan of the Relative Strength Indicator or RSI, it is currently around 70, indicating the potential of more upward movement.  Year to date 3M’s share price is up 16.75% and year over year it is up 35.49%.

S = Support is Provided by Institutional Investors & Company Insiders

3M is 68.25% institutionally owned.  The top five holders are Vanguard Group, Massachusetts Financial Services Co., BlackRock Institutional Trust, T.Rowe Price, and State Farm Insurance.

E = Earnings Are Increasing Quarter over Quarter

3M’s earnings per share increased about 4% quarter over quarter from $1.61 to $1.68.  The EPS for the year ago period was $1.63.  On an annual basis, the company’s 2012 EPS was $$6.05, up from FY 2011’s $5.72, an increase of about 5.6%. 

E = Excellent Relative Performance to Peers

Because of its diversification it is difficult to pinpoint an “apples to apples” competitor for 3M.  However, the company’s Return on Equity, or ROE, of 25,69% and operating margins of 21.28% outperform healthcare rival Johnson & Johnson (NYSE:JNJ) with an ROE of 14.26% and 17.74% operating margin. 3M also outperforms fellow Dow component and industrial conglomerate General Electric (NYSE:GE) with an ROE of 10.6% and an operating margin of 11.23%

T = Trends Support the Industry in which the Company Operates

Emerging economies are showing growth in middle class consumers with more disposable income which bodes well for 3M’s household and personal medical products.  In addition, the trend towards more industrialization and urbanization in emerging markets puts 3M in an enviable position with their industrial and chemical product offerings.

Conclusion

3M comes pretty close to being the perfect BUY and HOLD stock.  The company has increased its dividend payment for 53 straight years, an astounding track record that should attract all income investors. Value investors love companies with solid fundamental performance over long time frames.  3M’s history suggests that the company will still be making tape, adhesives, medical equipment, industrial materials, and office supplies in the year 2065 and rewarding its investors for another fifty years beyond.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.