Hey Henri,
Thanks for the question. As you know, 3M had a very good Q3 08 and performed better than I projected on my SSG. The questions we need to ask are: 1.Has the stock market stabilized at the current level, or will it drop lower? If it drops lower, it may take 3M with it. 2. With the current economic slow down affecting not only the US but also Europe and Asia, will 3M be able to grow sales and earnings enough to make shares purchased today more valuable in the future?
It is very difficult to answer #1. It does appear that the S&P 500 index may have found support at the 850 level. Every time the market hits that level, it bounces upward. 3M hit a severe recent low on 10-9-08 as did the S&P. 3M has not returned to that low since and is actually 18% higher than that level. So 3M has performed better than the S&P. If you look at the price chart for 3M and the S&P at Yahoo finance, you notice that the price of the 2 were moving in tandem until 10-18-08; 3M has gone up and S&P has stayed in a narrow range since then. The fact that shares of 3M are rising, and that the S&P may have found a support level are encouraging. (I attached the chart .)
To answer #2, I first looked at how the Co did during the last recession in 2001. Sales growth for 3M went from 6.8% in 2000, to -3.9% in 2001, to 1.6% in 2002. Sales were more robust in 2003 and the following years. (Sales have actually averaged 7.5% growth for the past 5 years. Much of this growth was from sales outside the US. The sales have also been positively affected by the devaluation of the US dollar in recent years. That appears to be reversing.) I adjusted my SSG (believing we are in a recession) to 0% growth for 2009, and 6.5% annual sales growth after that. That gives me an annual sales growth rate of 5.2% for the next 5 years. I also lowered my high PE to 19. The high PE has been slowly decreasing for the past 5 years and may continue to decrease if the recession is worse than “typical”. I lowered my low PE to 10 which is near the level it attained at the 52 week severe market low price of the stock. Even with the average low PE of 10, I had to lower the estimated low Price to $51. (15% below it’s recent 52 week low price.) Please review my SSG and let me know what you think.
I listened to the Q3 08 earnings report. The Co did not offer sales guidance for Q4 or for 2009. They feel that due to the economic volatility, sales predictions are impossible. Management does expect Operating Margins to be above 20%; it was 23.2% in Q3 08. There should be better guidance from the Co. at an upcoming investors meeting scheduled for 12-9-08.
I currently own shares of 3M. I always look to add to my holdings when a Co reports it’s quarterly results if the results are good and there is expected growth in the future; and assuming I can buy them at a somewhat discounted price. That may all be true for 3M. It is selling now at a PE that is the lowest the stock has ever traded for. The Co will most likely have a difficult year in 2009, but may grow after that. If you and your club have 3 to 5 years to hold the shares, they may be a good buy now. I am going to wait until I see what management says about 2009 at the investors call on 12-9-08. That will also give me a better sense of whether the market has support at this level or if it still is heading lower. I attached an updated SSG and a 3M/S&P price chart. Let me know what you think.
One last point that I am sure your club has discussed is the dividend yield the stock provides. At this price, the yield is 3.2% which is better than keeping the money in a savings acct. or money market account.
Pat Landers
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