Intrinsic value of 3M - MMM

Previous Close

$221.32

  Intrinsic Value

$131.44

stock screener

  Rating & Target

sell

-41%

  Value-price divergence*

-6%

Previous close

$221.32

 
Intrinsic value

$131.44

 
Up/down potential

-41%

 
Rating

sell

 
Value-price divergence*

-6%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MMM stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 132.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -0.55
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  30,109
  30,711
  31,418
  32,225
  33,131
  34,136
  35,238
  36,438
  37,737
  39,137
  40,639
  42,245
  43,960
  45,786
  47,726
  49,784
  51,966
  54,276
  56,718
  59,298
  62,023
  64,898
  67,930
  71,125
  74,493
  78,039
  81,773
  85,703
  89,839
  94,190
  98,766
Variable operating expenses, $m
 
  23,660
  24,183
  24,781
  25,452
  26,196
  27,012
  27,901
  28,863
  29,900
  31,012
  31,285
  32,555
  33,907
  35,344
  36,868
  38,484
  40,194
  42,003
  43,914
  45,932
  48,061
  50,306
  52,672
  55,166
  57,792
  60,558
  63,468
  66,531
  69,753
  73,142
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  22,886
  23,660
  24,183
  24,781
  25,452
  26,196
  27,012
  27,901
  28,863
  29,900
  31,012
  31,285
  32,555
  33,907
  35,344
  36,868
  38,484
  40,194
  42,003
  43,914
  45,932
  48,061
  50,306
  52,672
  55,166
  57,792
  60,558
  63,468
  66,531
  69,753
  73,142
Operating income, $m
  7,223
  7,051
  7,234
  7,444
  7,679
  7,940
  8,226
  8,537
  8,874
  9,237
  9,627
  10,960
  11,405
  11,879
  12,382
  12,916
  13,482
  14,081
  14,715
  15,385
  16,091
  16,837
  17,624
  18,453
  19,327
  20,247
  21,215
  22,235
  23,308
  24,437
  25,624
EBITDA, $m
  8,697
  8,786
  8,988
  9,219
  9,478
  9,766
  10,081
  10,424
  10,796
  11,196
  11,626
  12,086
  12,576
  13,099
  13,654
  14,243
  14,867
  15,527
  16,226
  16,964
  17,744
  18,566
  19,434
  20,348
  21,311
  22,326
  23,394
  24,518
  25,702
  26,946
  28,255
Interest expense (income), $m
  194
  375
  391
  409
  429
  452
  477
  505
  535
  568
  603
  641
  681
  724
  770
  819
  871
  926
  984
  1,045
  1,110
  1,179
  1,251
  1,327
  1,408
  1,492
  1,582
  1,676
  1,774
  1,878
  1,988
Earnings before tax, $m
  7,053
  6,676
  6,844
  7,035
  7,250
  7,488
  7,749
  8,032
  8,339
  8,670
  9,024
  10,320
  10,724
  11,155
  11,612
  12,097
  12,612
  13,156
  13,731
  14,339
  14,981
  15,659
  16,373
  17,126
  17,919
  18,754
  19,634
  20,560
  21,534
  22,558
  23,636
Tax expense, $m
  1,995
  1,802
  1,848
  1,900
  1,958
  2,022
  2,092
  2,169
  2,252
  2,341
  2,436
  2,786
  2,896
  3,012
  3,135
  3,266
  3,405
  3,552
  3,707
  3,872
  4,045
  4,228
  4,421
  4,624
  4,838
  5,064
  5,301
  5,551
  5,814
  6,091
  6,382
Net income, $m
  5,050
  4,873
  4,996
  5,136
  5,293
  5,466
  5,657
  5,864
  6,088
  6,329
  6,588
  7,533
  7,829
  8,143
  8,477
  8,831
  9,206
  9,604
  10,024
  10,468
  10,936
  11,431
  11,952
  12,502
  13,081
  13,691
  14,333
  15,008
  15,720
  16,468
  17,254

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,678
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  32,906
  30,835
  31,544
  32,354
  33,265
  34,273
  35,380
  36,584
  37,889
  39,294
  40,802
  42,415
  44,137
  45,969
  47,917
  49,984
  52,175
  54,494
  56,946
  59,536
  62,272
  65,158
  68,203
  71,411
  74,792
  78,352
  82,101
  86,047
  90,199
  94,568
  99,163
Adjusted assets (=assets-cash), $m
  30,228
  30,835
  31,544
  32,354
  33,265
  34,273
  35,380
  36,584
  37,889
  39,294
  40,802
  42,415
  44,137
  45,969
  47,917
  49,984
  52,175
  54,494
  56,946
  59,536
  62,272
  65,158
  68,203
  71,411
  74,792
  78,352
  82,101
  86,047
  90,199
  94,568
  99,163
Revenue / Adjusted assets
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
  0.996
Average production assets, $m
  10,976
  11,210
  11,467
  11,762
  12,093
  12,460
  12,862
  13,300
  13,774
  14,285
  14,833
  15,420
  16,045
  16,712
  17,420
  18,171
  18,968
  19,811
  20,702
  21,644
  22,638
  23,688
  24,794
  25,961
  27,190
  28,484
  29,847
  31,282
  32,791
  34,379
  36,050
Working capital, $m
  5,507
  3,870
  3,959
  4,060
  4,175
  4,301
  4,440
  4,591
  4,755
  4,931
  5,120
  5,323
  5,539
  5,769
  6,013
  6,273
  6,548
  6,839
  7,146
  7,472
  7,815
  8,177
  8,559
  8,962
  9,386
  9,833
  10,303
  10,799
  11,320
  11,868
  12,445
Total debt, $m
  11,695
  11,165
  11,672
  12,253
  12,904
  13,626
  14,419
  15,281
  16,215
  17,221
  18,301
  19,456
  20,689
  22,001
  23,396
  24,876
  26,444
  28,104
  29,860
  31,715
  33,674
  35,740
  37,920
  40,217
  42,638
  45,187
  47,872
  50,697
  53,670
  56,798
  60,087
Total liabilities, $m
  22,608
  22,078
  22,585
  23,166
  23,817
  24,539
  25,332
  26,194
  27,128
  28,134
  29,214
  30,369
  31,602
  32,914
  34,309
  35,789
  37,357
  39,017
  40,773
  42,628
  44,587
  46,653
  48,833
  51,130
  53,551
  56,100
  58,785
  61,610
  64,583
  67,711
  71,000
Total equity, $m
  10,298
  8,757
  8,958
  9,189
  9,447
  9,734
  10,048
  10,390
  10,760
  11,159
  11,588
  12,046
  12,535
  13,055
  13,609
  14,196
  14,818
  15,476
  16,173
  16,908
  17,685
  18,505
  19,370
  20,281
  21,241
  22,252
  23,317
  24,437
  25,617
  26,857
  28,162
Total liabilities and equity, $m
  32,906
  30,835
  31,543
  32,355
  33,264
  34,273
  35,380
  36,584
  37,888
  39,293
  40,802
  42,415
  44,137
  45,969
  47,918
  49,985
  52,175
  54,493
  56,946
  59,536
  62,272
  65,158
  68,203
  71,411
  74,792
  78,352
  82,102
  86,047
  90,200
  94,568
  99,162
Debt-to-equity ratio
  1.136
  1.270
  1.300
  1.330
  1.370
  1.400
  1.440
  1.470
  1.510
  1.540
  1.580
  1.620
  1.650
  1.690
  1.720
  1.750
  1.780
  1.820
  1.850
  1.880
  1.900
  1.930
  1.960
  1.980
  2.010
  2.030
  2.050
  2.070
  2.100
  2.110
  2.130
Adjusted equity ratio
  0.258
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284
  0.284

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  5,050
  4,873
  4,996
  5,136
  5,293
  5,466
  5,657
  5,864
  6,088
  6,329
  6,588
  7,533
  7,829
  8,143
  8,477
  8,831
  9,206
  9,604
  10,024
  10,468
  10,936
  11,431
  11,952
  12,502
  13,081
  13,691
  14,333
  15,008
  15,720
  16,468
  17,254
Depreciation, amort., depletion, $m
  1,474
  1,735
  1,754
  1,775
  1,799
  1,826
  1,855
  1,887
  1,922
  1,959
  1,999
  1,126
  1,171
  1,220
  1,272
  1,326
  1,384
  1,446
  1,511
  1,580
  1,652
  1,729
  1,810
  1,895
  1,985
  2,079
  2,179
  2,283
  2,394
  2,509
  2,631
Funds from operations, $m
  6,619
  6,608
  6,750
  6,911
  7,092
  7,292
  7,512
  7,751
  8,010
  8,288
  8,587
  8,659
  9,000
  9,363
  9,748
  10,157
  10,591
  11,050
  11,535
  12,048
  12,589
  13,160
  13,762
  14,397
  15,066
  15,770
  16,511
  17,292
  18,113
  18,977
  19,886
Change in working capital, $m
  -43
  76
  89
  102
  114
  127
  139
  151
  164
  176
  189
  202
  216
  230
  244
  259
  275
  291
  308
  325
  343
  362
  382
  403
  424
  447
  470
  495
  521
  548
  577
Cash from operations, $m
  6,662
  6,532
  6,661
  6,809
  6,978
  7,166
  7,373
  7,600
  7,846
  8,112
  8,398
  8,456
  8,784
  9,133
  9,504
  9,898
  10,316
  10,759
  11,227
  11,722
  12,246
  12,798
  13,380
  13,994
  14,641
  15,323
  16,041
  16,797
  17,592
  18,429
  19,309
Maintenance CAPEX, $m
  0
  -801
  -818
  -837
  -859
  -883
  -909
  -939
  -971
  -1,005
  -1,043
  -1,083
  -1,126
  -1,171
  -1,220
  -1,272
  -1,326
  -1,384
  -1,446
  -1,511
  -1,580
  -1,652
  -1,729
  -1,810
  -1,895
  -1,985
  -2,079
  -2,179
  -2,283
  -2,394
  -2,509
New CAPEX, $m
  -1,420
  -234
  -258
  -295
  -331
  -367
  -402
  -438
  -474
  -511
  -548
  -586
  -626
  -666
  -708
  -751
  -796
  -843
  -891
  -942
  -994
  -1,049
  -1,107
  -1,166
  -1,229
  -1,294
  -1,363
  -1,435
  -1,510
  -1,588
  -1,670
Cash from investing activities, $m
  -1,403
  -1,035
  -1,076
  -1,132
  -1,190
  -1,250
  -1,311
  -1,377
  -1,445
  -1,516
  -1,591
  -1,669
  -1,752
  -1,837
  -1,928
  -2,023
  -2,122
  -2,227
  -2,337
  -2,453
  -2,574
  -2,701
  -2,836
  -2,976
  -3,124
  -3,279
  -3,442
  -3,614
  -3,793
  -3,982
  -4,179
Free cash flow, $m
  5,259
  5,498
  5,584
  5,678
  5,788
  5,916
  6,061
  6,223
  6,401
  6,596
  6,807
  6,787
  7,032
  7,295
  7,576
  7,875
  8,193
  8,531
  8,890
  9,269
  9,671
  10,096
  10,544
  11,018
  11,517
  12,044
  12,599
  13,183
  13,799
  14,447
  15,129
Issuance/(repayment) of debt, $m
  1,043
  442
  508
  580
  652
  722
  792
  863
  934
  1,006
  1,080
  1,155
  1,233
  1,312
  1,395
  1,480
  1,568
  1,660
  1,756
  1,855
  1,959
  2,067
  2,180
  2,297
  2,421
  2,549
  2,684
  2,825
  2,973
  3,128
  3,290
Issuance/(repurchase) of shares, $m
  -2,949
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,948
  442
  508
  580
  652
  722
  792
  863
  934
  1,006
  1,080
  1,155
  1,233
  1,312
  1,395
  1,480
  1,568
  1,660
  1,756
  1,855
  1,959
  2,067
  2,180
  2,297
  2,421
  2,549
  2,684
  2,825
  2,973
  3,128
  3,290
Total cash flow (excl. dividends), $m
  3,278
  5,939
  6,092
  6,258
  6,440
  6,639
  6,854
  7,086
  7,335
  7,602
  7,886
  7,942
  8,265
  8,608
  8,971
  9,355
  9,762
  10,192
  10,645
  11,125
  11,630
  12,163
  12,724
  13,315
  13,938
  14,593
  15,283
  16,009
  16,772
  17,575
  18,419
Retained Cash Flow (-), $m
  1,131
  -165
  -201
  -230
  -258
  -286
  -314
  -342
  -370
  -399
  -428
  -458
  -489
  -521
  -553
  -587
  -622
  -659
  -696
  -736
  -777
  -820
  -865
  -911
  -960
  -1,011
  -1,065
  -1,121
  -1,179
  -1,241
  -1,305
Prev. year cash balance distribution, $m
 
  1,706
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,480
  5,891
  6,028
  6,182
  6,352
  6,539
  6,743
  6,964
  7,203
  7,458
  7,484
  7,776
  8,087
  8,417
  8,768
  9,140
  9,533
  9,949
  10,389
  10,853
  11,343
  11,859
  12,404
  12,978
  13,582
  14,218
  14,888
  15,593
  16,334
  17,114
Discount rate, %
 
  4.40
  4.62
  4.85
  5.09
  5.35
  5.62
  5.90
  6.19
  6.50
  6.83
  7.17
  7.53
  7.90
  8.30
  8.71
  9.15
  9.60
  10.08
  10.59
  11.12
  11.67
  12.26
  12.87
  13.51
  14.19
  14.90
  15.64
  16.43
  17.25
  18.11
PV of cash for distribution, $m
 
  7,165
  5,382
  5,229
  5,067
  4,895
  4,712
  4,516
  4,307
  4,086
  3,854
  3,495
  3,256
  3,009
  2,758
  2,505
  2,253
  2,005
  1,765
  1,535
  1,318
  1,116
  932
  766
  619
  492
  384
  294
  220
  162
  116
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

3M Company is a technology company. It operates through five segments. The Industrial segment serves a range of markets, such as automotive original equipment manufacturer and automotive aftermarket, electronics, appliance, paper and printing, packaging, food and beverage, and construction. The Safety and Graphics segment serves a range of markets for the safety, security and productivity of people, facilities and systems. The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, health information systems, and food manufacturing and testing. The Electronics and Energy segment serves customers in electronics and energy markets, including solutions for the performance of electronic devices; electrical products, including infrastructure protection, and power generation and distribution. The Consumer segment serves markets that include consumer retail, office business to business, home improvement, drug and pharmacy retail, and other markets.

FINANCIAL RATIOS  of  3M (MMM)

Valuation Ratios
P/E Ratio 26.2
Price to Sales 4.4
Price to Book 12.8
Price to Tangible Book
Price to Cash Flow 19.8
Price to Free Cash Flow 25.2
Growth Rates
Sales Growth Rate -0.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2.8%
Cap. Spend. - 3 Yr. Gr. Rate -3.1%
Financial Strength
Quick Ratio 3
Current Ratio 0
LT Debt to Equity 104.1%
Total Debt to Equity 113.6%
Interest Coverage 37
Management Effectiveness
Return On Assets 15.8%
Ret/ On Assets - 3 Yr. Avg. 15.6%
Return On Total Capital 22.8%
Ret/ On T. Cap. - 3 Yr. Avg. 22.8%
Return On Equity 46.5%
Return On Equity - 3 Yr. Avg. 39.4%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 50.1%
Gross Margin - 3 Yr. Avg. 49.3%
EBITDA Margin 29%
EBITDA Margin - 3 Yr. Avg. 27.9%
Operating Margin 24%
Oper. Margin - 3 Yr. Avg. 23.1%
Pre-Tax Margin 23.4%
Pre-Tax Margin - 3 Yr. Avg. 22.7%
Net Profit Margin 16.8%
Net Profit Margin - 3 Yr. Avg. 16.1%
Effective Tax Rate 28.3%
Eff/ Tax Rate - 3 Yr. Avg. 28.7%
Payout Ratio 53%

MMM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MMM stock intrinsic value calculation we used $30109 million for the last fiscal year's total revenue generated by 3M. The default revenue input number comes from 2016 income statement of 3M. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MMM stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.4%, whose default value for MMM is calculated based on our internal credit rating of 3M, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of 3M.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MMM stock the variable cost ratio is equal to 77.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MMM stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for 3M.

Corporate tax rate of 27% is the nominal tax rate for 3M. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MMM stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MMM are equal to 36.5%.

Life of production assets of 13.7 years is the average useful life of capital assets used in 3M operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MMM is equal to 12.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $10298 million for 3M - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 596.794 million for 3M is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of 3M at the current share price and the inputted number of shares is $132.1 billion.

Management's discussion and analysis

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As described in Note 16,  effective in the first quarter of 2016, 3M made a product line reporting change involving two of its business segments. Segment information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis. Any references to “Membrana” refer to the former Separations Media business acquired by 3M from Polypore in 2015.

Year 2016 versus Year 2015 EPS:

For total year 2016, net income attributable to 3M was $5.050 billion, or $8.16 per diluted share, compared to $4.833 billion, or $7.58 per diluted share, in 2015, an increase of 7.7 percent on a per diluted share basis. Operational benefits increased earnings, helped by lower defined benefit pension and postretirement expenses. Operational benefits also included the combination of higher selling prices and lower raw material costs, in addition to productivity benefits related to the fourth quarter 2015 restructuring. These operational benefits were partially offset by the impact of flat organic sales and lower asset utilization. Restructuring actions resulted in an after-tax charge of 14 cents per diluted share in 2015, which provided a year-on-year benefit in 2016.

Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016), and the divestitures of Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and the license plate converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business and its cathode battery technology out-licensing business. On a combined basis, these acquisition/divestiture year-on-year impacts resulted in a 14 cents per diluted share benefit to earnings per share in 2016, driven by solid performances from 2015 acquisitions and year-on-year divestiture gains. Refer to Note 2 for further discussion of these acquisition/divestiture impacts.

Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $127 million year-on-year in 2016, excluding the impact of foreign currency changes on tax rates. This is equivalent to a year-on-year decrease of 14 cents per diluted share for 2016.

Over the past few years, 3M has taken actions to better optimize its capital structure and reduce its cost of capital by adding debt. These actions have led to an increase in interest expense year-on-year in 2016, largely due to higher average debt balances.

The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage points versus last year. The 2016 change in tax rate was driven by a number of factors as referenced in Note 8, including the first quarter 2016 adoption of Accounting Standards Update (ASU) No. 2016-09 (discussed in Note 1).

Weighted-average diluted shares outstanding in 2016 declined 3 percent versus last year, which benefited earnings per share. The benefits from share repurchases, net of issuances, were partially offset by the adoption of ASU No. 2016-09, which increased the calculated number of diluted shares in 2016.

Year 2015 versus Year 2014 EPS:

For total year 2015, net income attributable to 3M was $4.833 billion, or $7.58 per diluted share, compared to $4.956 billion, or $7.49 per diluted share, in 2014, an increase of 1.2 percent on a per diluted share basis. Operational benefits include the combination of selling price increases and raw material cost decreases, partially offset by higher pension/postretirement benefit costs. Restructuring actions (discussed in Note 4) resulted in an after-tax charge of 14 cents per diluted share. Acquisition and divestiture impacts primarily relate to the Capital Safety and Membrana acquisitions, and the divestitures of the license plate converting business in France and substantially all of the library systems business. Foreign exchange impacts decreased earnings per diluted share by approximately 43 cents year-on-year, driven by average year-on-year changes in foreign exchange rates in the Euro of 17 percent, Yen of 12 percent, and Brazil Real of 30 percent. The income tax rate was largely unchanged year-on-year. Weighted-average diluted shares outstanding in 2015 declined 3.7 percent year-on-year to 637.2 million, which increased earnings per diluted share by approximately 28 cents. Refer to the section entitled “Results of Operations” for further discussion.

Fourth-quarter 2016 sales and operating income results:

Fourth-quarter 2016 net income attributable to 3M was $1.155 billion, or $1.88 per diluted share, compared to $1.038 billion, or $1.66 per diluted share, in the fourth quarter of 2015. Fourth-quarter 2016 sales totaled $7.3 billion, an increase of 0.4 percent from the fourth quarter of 2015. Organic-local currency sales increased 1.6 percent, with organic volume increases of 1.5 percent and higher selling prices contributing 0.1 percent. Divestitures reduced sales by 0.4 percent, which related to the fourth quarter 2015 sale of both the license plate converting business in France, along with substantially all of the library systems business. In addition, in the fourth quarter of 2016, 3M sold the assets of its 

protective films business and its cathode battery technology out-licensing business. Foreign currency translation reduced sales by 0.8 percent year-on-year.

From a business segment perspective, 3M achieved organic local-currency sales growth (which includes organic volume and selling price impacts) in Industrial, Safety and Graphics, and Health Care, with declines in Electronics and Energy, and Consumer.

On an organic local-currency sales basis:

· Sales increased 4.6 percent in Industrial, with sales growth led by automotive OEM, advanced materials, separation and purification, and automotive aftermarket. Sales declined in aerospace and commercial transportation.
· Sales increased 2.2 percent in Safety and Graphics, with sales increases in roofing granules, personal safety, and commercial solutions. Sales declined in traffic safety and security.
· Sales increased 1.3 percent in Health Care, with sales increases in food safety, critical and chronic care, drug delivery systems, and infection prevention. Sales declined slightly in oral care, as this business continued to be impacted by soft end-market conditions and channel inventory adjustments. Health information systems also declined due to a slower rate of software installations in a tougher market over the past year, along with a challenging comparison against last year’s fourth quarter.
· Sales decreased 0.6 percent in Electronics and Energy. Electronics-related sales were flat, with growth in electronics materials solutions more than offset by a decline in display materials and systems. This was an improvement over recent quarters as end-market conditions and channel inventories became more stable. Energy-related sales declined 2 percent as growth in telecommunications markets was offset by declines in electrical markets, and renewable energy. In December 2015, 3M exited its backsheet business in renewable energy, which reduced energy-related organic sales by 3.5 percent year-on-year.
· Sales decreased 0.7 percent in the Consumer business segment. Despite channel inventory adjustments, 3M posted organic growth in the home improvement, consumer health care, and home care businesses. The stationery and office supplies business, which was most impacted by channel inventory adjustments, declined year-on-year.

From a geographic area perspective, fourth-quarter 2016 organic local-currency sales increased in Latin America/Canada, Asia Pacific, and the United States. Organic local-currency sales declined in EMEA.

On an organic local-currency sales basis:
· Sales in Latin America/Canada increased 4.1 percent. 3M saw growth in four of its five business segments, led by Health Care. Sales in Mexico increased 10 percent, Canada was up 3 percent and Brazil increased 1 percent.
· Sales in Asia Pacific increased 2.4 percent, led by Health Care and Consumer. This growth was partially offset by a decline in Electronics and Energy. Within Asia Pacific, sales increased 6 percent in China/Hong Kong, and increased 3 percent in Japan. Excluding our electronics-related businesses, China/Hong Kong was up 11 percent and Japan grew 2 percent.
· Organic local-currency sales in the United States increased 1.2 percent, led by Industrial, Health Care, and Safety and Graphics.
· Organic local-currency sales in EMEA declined 2.4 percent. West Europe declined 1 percent, as growth in Safety and Graphics, and Industrial, was more than offset by declines in other business groups. Central East Europe and Middle East Africa declined 6 percent, impacted by ongoing challenges in Saudi Arabia and Turkey, which 3M expects to persist in the near term.

Operating income in the fourth quarter of 2016 was 22.7 percent of sales, compared to 20.5 percent of sales in the fourth quarter of 2015, an increase of 2.2 percentage points. The year-on-year comparison related to 2015 restructuring charges increased operating income margins by 1.6 percentage points. In addition, lower pension/postretirement benefit costs, raw material cost decreases, year-on-year divestiture gains, and productivity benefits improved operating income margins. These benefits were partially offset by strategic investments and legal costs, with these items discussed on an annual basis in the “Operating income margin” section.

Year 2016 sales and operating income results:

Sales totaled $30.1 billion, a decrease of 0.5 percent from 2015. Organic local-currency sales declined 0.1 percent, with organic volumes declines of 0.8 percent largely offset by selling price increases of 0.7 percent. Acquisitions added 1.2 percent to sales, while divestitures reduced sales by 0.4 percent. Foreign currency translation reduced sales by 1.2 percent year-on-year.

From a business segment perspective, organic local-currency sales increased 3.5 percent in Health Care, 2.2 percent in Safety and Graphics, 1.9 percent in Consumer, and were flat in Industrial, while sales declined 7.5 percent in Electronics and Energy. From a geographic area perspective, 2016 organic local-currency sales grew 3.7 percent in Latin America/Canada, 0.5 percent in the United States, 0.4 percent in EMEA, and declined 2.8 percent in Asia Pacific. Refer to the sections entitled “Performance by Business Segment” and “Performance by Geographic Area” for additional detail.

Operating income in 2016 was 24.0 percent of sales, compared to 22.9 percent of sales in 2015, an increase of 1.1 percentage points. Restructuring actions resulted in a pre-tax charge of $114 million in 2015, which provided a year-on-year benefit in 2016. These results also included a benefit from the combination of selling price increases and raw material cost decreases, plus lower pension/postretirement benefit costs. Refer to the section entitled “Results of Operations” for further discussion.

Year 2015 sales and operating income results:

Sales totaled $30.3 billion, a decrease of 4.9 percent from 2014. Organic local-currency sales grew 1.3 percent, with higher organic volumes contributing 0.2 percent and selling price increases contributing 1.1 percent. Acquisitions added 0.8 percent to sales, while divestitures reduced sales by 0.2 percent. Foreign currency translation reduced sales by 6.8 percent year-on-year.

From a business segment perspective, organic local-currency sales increased 3.7 percent in Health Care, 3.4 percent in Consumer, 2.4 percent in Safety and Graphics, and 0.4 percent in Industrial, while sales declined 1.5 percent in Electronics and Energy. From a geographic area perspective, 2015 organic local-currency sales grew 2.1 percent in the United States, 1.5 percent in Latin America/Canada, 0.9 percent in Asia Pacific, and 0.8 percent in EMEA. Refer to the sections entitled “Performance by Business Segment” and “Performance by Geographic Area” for additional detail.

Operating income in 2015 was 22.9 percent of sales, compared to 22.4 percent of sales in 2014, an increase of 0.5 percentage points. These results included a benefit from the combination of selling price increases and raw material cost decreases, partially offset by higher pension/postretirement benefit costs and 2015 restructuring charges. Refer to the section entitled “Results of Operations” for further discussion.

[Source: Form 10-K dated 2017-02-09]

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Financial statements of MMM
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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