How Much Is 3M Worth?

There's nothing wrong with looking abroad for great investment ideas, but investors trying to score some global exposure don't need to look far from home. Many U.S.-headquartered multinationals have significant exposure overseas, giving them the opportunity to tap the growth of emerging markets.

A great example of this kind of opportunity is 3M (NYSE: MMM), which had more than 60% of its 2009 revenue come from outside the United States. With 3M, you get a well-established, diversified business with a strong balance sheet and a history of impressive returns on equity.

But is 3M's stock an attractive buy at today's $84 price tag? Well, let's take a closer look to see if we've got ourselves a global bargain.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how 3M stacks up.

Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance. Average excludes 3M.

Using each of those averages to back into a stock price for 3M, and then taking the average across those results, we can come up with an estimated price-per-share of roughly $82. This would suggest today's price is slightly overvalued.

A comparable company analysis like this can sometimes raise as many questions as it answers, though. For instance, is the entire group properly valued? A supposedly fairly valued -- or even overvalued -- stock among a bunch of other undervalued stocks may actually be an undervalued stock, and vice versa.

Also, while these businesses are comparable to 3M, none is a perfect match. United Technologies, for instance, is a leader in escalators and elevators through its Otis division, while Honeywell has significant sales to the U.S. government because of its defense-related businesses. And of course GE has been knocked around by its big finance segment. And while these are all global businesses, the geographic mix of their sales varies from company to company.

So with all that in mind, it's best to combine comparable company analysis with another valuation technique.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow (DCF). Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it attempts to predict the future, it can be a fickle beast and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For 3M's DCF, I used the following assumptions:

Source: Capital IQ, Yahoo! Finance, and author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

I've also included 3M's acquisitions and divestitures with capital expenditures since this is a pretty consistent part of 3M's operations and affects the company's growth. And finally, I throttled back analysts' current long-term growth estimates from 12.4% to 8% -- the company is optimistic on its growth prospects and analysts seem to agree, but considering 3M's historical growth rates, I'll make the company prove me wrong.

Based on the assumptions above, a simple DCF model spits out a per-share value of just about $82 for 3M's stock. It's not all that often that these two valuation methods come up with almost exactly the same number, so it would seem we have some confirmation that 3M's stock is a bit overvalued right now.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well-advised to play with the numbers further before making a final decision on 3M's stock.

That said, with an estimated fair value of $82, the stock probably doesn't qualify as a bargain right now. Of course that doesn't mean that a case can't still be made for the stock. Recall some of the assumptions I made above. If, for example, I got on board with Wall Street's 12.4% growth estimate for the next five years -- which would also raise my growth estimate for the five years following that -- the DCF-calculated price jumps to $101. If I lower my cost of equity to 10%, then the target price becomes $105. And if I were to do both, well, let's just say the stock would look like a pretty compelling bargain.

As an owner of 3M stock myself, though, I like the assumptions that I've used -- they reflect the level of returns I like to shoot for and my sense of what's reasonably achievable for the company. And while buying more 3M is not on my to-do list, I'm also not interested in unloading my shares. As long as the price doesn't get out of control, I'd prefer to hold onto a high-quality company like this and benefit from compounding growth and reliable, growing dividend payments.

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