Ah, the power of stupid headlines. On a day when people were blaming the entire market's drop on Caterpillar (NYSE:CAT), what would the addled copy-desk drones out there have done if we were seeing another record day in the Dow? Given credit to 3M (NYSE:MMM)?
Maybe. But let's not be foolish (with a little f) and overstate things, as the headlines do.
Let's just give 3M a golf clap for a decent earnings report. Revenues for Q3 were a record $5.9 billion, a rise of 8.8%, or 7.3% in local currencies. Net income per share was up 9.3%, to $1.18 per share. Here's what I like best, however: seeing free cash flow during the quarter outrun either of those figures. It rose 11.6% over Q3 2005, to $787 million.
Margins can move all over the place at 3M, because it sells so many different kinds of . well, stuff. So I try not to get too uptight about movement, but it's worth remarking that gross margins dropped two percentage points, while the firm held the line on other costs and kept the slippage in operating margins to 63 basis points.
Probably the most noteworthy comeback was in 3M's much-discussed film business for the LCD TV industry. That segment produced record revenues and seems to have recovered nicely from the summer flub. It appears 3M was giving it to us straight when it explained that hiccup as a result of poorer-than-expected uptake of widescreens for the World Cup.
And now that we're out of the summer's consumer funk, I expect that segment to continue to deliver. When I stop in a Best Buy (NYSE:BBY) or CircuitCity (NYSE:CC), I see nothing but widescreens, a large percentage of which are LCD. With what I believe will be a major computer upgrade cycle on the horizon, not to mention a console war beginning with the late entry of Sony's (NYSE:SNE) newest PlayStation, I believe the retailers will continue moving those units, and 3M will get its share of the spoils.
But let's be honest, no one out there should be buying 3M looking for outrageous growth. Indeed, I began stumping for 3M many months back because, quite simply, it looked pretty cheap on a cash-flow valuation. (My colleagues at Inside Value agreed, recommending the stock.)
Cash flows lag my expectations a bit, but it looks like much of the shortfall is due to an inventory buildup. Now, normally a 25% jump in inventory, coupled with a single-digit rise in revenues, would have me yelling "Dude, watch out!" But on the call, 3M management explained that the current buildup is being made in order to provide better service to customers, and that the company plans to work on improving its supply chain in order to diminish the need going forward.
I take managers at their word on that one, and I continue to like this stock. Yes, it looked like a better deal a few months back when everyone freaked out, but 3M still trades at a pretty steep discount to its historical price-to-sales and price-to-earnings averages. I know, a P/E comparable multiple and $3.89 will get you a triple-fat double dolce mocha. But based on expected cash flows, I think shares are worth more like $100 each, implying a current discount of about 21%. For a company as solid as 3M, that still looks like a buy to me.
3M is a recommendation of Motley Fool Inside Value . For an in-depth look at the logic behind the recommendation, a free trial is available.
At the time of publication, Seth Jayson had shares of 3M, but no positions in any other firm mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Best Buy is a Motley Fool Stock Advisor recommendation. Fool rules are here.
