Analyst: Jordan A.

Mielke

Recommendation
Target (todays value)
Current Price
52 week range

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

Industrial Conglomerate

BUY
$172.00
$160.60
$132.90 - $170.50

3M Company

Share Data
Ticker:

MMM

Market Cap. (Billion):

$101.875

Inside Ownership

0.1%

Inst. Ownership

92.9%

Beta

1.09

Dividend Yield

2.5%

Payout Ratio

44.7%

Cons. Long-Term Growth Rate

17.8%

12,000

$180

10,000

$160

8,000

$140

6,000

$120

4,000

$100

2,000

$80

0
11
Sales (billions)
Year
$29.61
Gr %
11.1%
Cons
$29.08
EPS
$6.05
Cons
$6.17
Gr %
5.6%

May 10, 2015

12

13

14

15E

$29.90
1.0%
$30.60
$6.40
$6.35
5.9%

$30.87
3.2%
$31.30
$6.83
$6.86
6.7%

$31.82
3.1%
$32.56
$7.63
$7.47
11.7%

$32.95
3.6%
$32.95
$8.26
$8.21
8.2%

Ratio

11

12

13

14

15E

ROE (%)
Industry
NPM (%)
Industry
A. T/O
ROA (%)
Industry
A/E

27.3%
9.9%
14.5%
6.3%
0.96
14.1%
2.3%
1.94

26.6%
14.1%
14.9%
9.1%
0.91
13.8%
3.3%
1.93

26.2%
11.3%
15.1%
7.3%
0.92
14.0%
2.8%
1.87

32.2%
14.7%
15.6%
10.1%
0.98
15.4%
4.0%
2.08

38.0%
15.0%
15.8%
10.5%
1.02
16.2%
3.5%
2.35

$60
7/12 10/12 1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15 4/15
Source: FactSet Prices

Summary: I recommend a buy rating for 3M Company (MMM) with a 12 month

target price of $172.00. Tailwinds from European and Chinese expansion and
reduced headwinds from foreign exchange will drive up margins and sales growth.
The stock is undervalued based on a weighted average between discounted cash
flow and sum-of-parts valuation methods.

Key Drivers:

Chinese and European expansion: Economic growth in China and Europe

will drive sales growth for selected business segments.

Foreign exchange exposure: Because roughly two thirds of 3Ms revenues

are derived from outside the US, fluctuating foreign currencies may help or
hinder the companys international sales growth.

Valuation

11

12

13

14

P/E
Industry
P/S
P/B
P/CF
EV/EBITDA

13.88
19.21
1.96
3.38
11.30
8.0x

14.86
15.50
2.17
3.64
12.32
8.5x

21.54
25.50
3.08
5.31
17.44
12.1x

22.52
17.74
3.32
6.51
16.80
12.9x

Research & development: As 3M steps up R&D expenditures in forward

years, it is anticipated that the company will expand operating margins and
increase sales growth with exclusivity rights on unique product offerings.
Intellectual property derived from R&D investments is a key to 3Ms future
success.

Enterprise resource planning (ERP) system: As an ERP database

management system is fully implemented in Europe and the United States,
it will reduce supply chain risk and expand operating margins.

Performance

MMM

Industry

1 Month
3 Month
YTD
52-week
3-year

-5.2%
-3.6%
11.5%
12.4%
75.0%

1.5%
4.9%
0.5%
3.3%
45.4%

Contact: Jordan A. Mielke

Email: [email protected]
Phone: 715.441.0052

Valuation: Using two different valuation metrics, 3M is shown to be undervalued.

With no direct comparables, a weighted average between a DCF and sum-ofparts valuation provides an accurate target price for the company.
Risks: Threats to the business include foreign currency exposure, introduction of
new products, natural disasters, international economic conditions, management
and new tax laws

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Company Overview
3M Company (MMM) is a global manufacturer of diversified technology and sells products that have
a presence in consumer and industrial markets. 3M operates in over 70 countries, sells products in
230 countries and approximately two thirds of its revenues come from outside the United States.
3M Company was founded in 1902 and is headquartered in St. Paul, Minnesota.
3M generates revenue from the sale of a wide variety of products. The majority of 3Ms revenue is
derived from inter-business or non-consumer sales. 3M revenues are generated through the
following business segments:

Industrial: Abrasives, adhesives, specialty materials, and many various components

produced for industries such as automotive, electronics, paper and printing, packaging,
food and beverage, and construction.
Safety and Graphics: Equipment made for head, eye, and ear protection, commercial
graphics sheeting and films for signs, pavement marking, and other various surfaces, nonwoven abrasives.
Electronics and Energy: Electronics include components for LCD display devices, PCs,
tablets, smart phones, and fluids and abrasives for other small electronic devices, energy
solutions produces electrical, telecommunications, renewable energy, and infrastructure
protection products.
Health Care: Produces supplies for medical clinics and hospitals, pharmaceuticals, and
dental and orthodontic practitioners, and food safety-testing facilities, develops software
for health information systems and offers related consulting services.
Consumer: Includes office supplies, home-care, home improvement (do-it-yourself),
consumer health, and personal safety products.

Figures 1 and 2: 3M revenue sources for 2014 (left) and historical revenue growth by business segment (right)

8%

Health
Care
17%

Industrial

6%

Consumer
14%
Industrial
34%

4%
2%

Safety &
Graphics

0%

Electronics
& Energy

-2%

Health
Care

-4%

Consumer

Source: Company reports

2016

2015

2014

-6%
2013

Safety &
Graphics
18%

2012

Electronics
& Energy
17%

Source: Company reports

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Business Drivers
Several factors contribute to 3Ms future success; the following are the most important business
drivers:
1)
2)
3)
4)

Emerging market and European expansion

Foreign exchange exposure
Research & development
Enterprise Resource Planning (ERP) System

Figure 3: Historical and forecasted growth by geographic region

Figure 4: 3Ms sales by geographic region

United
States

12%
10%

Asia Pacific

8%

United States

12%
37%

22%

6%
Europe,
Middle East
& Africa
Latin
America &
Canada

4%
2%
2016

2015

2014

2013

2012

Europe, Middle
East & Africa

29%

Source: Company reports

Latin America &

Canada

Source: Company reports

Chinese and European expansion

3M has generated the majority of its revenues from outside of the United States for the last 20 years
as it has tapped into emerging and developed markets around the world. Asia Pacific has a five-year
CAGR of 9.0% as it has had positive growth in all business segments. It has led 3Ms Safety &
Graphics segment with sometimes double-digit organic growth, heavily due to demand for
respirators driven by manufacturing industry growth in China and increasing CO2 emissions (see
Figure 5 below).
Figure 5: CO2 emissions in China and Safety & Graphics sales growth

2012

2011

2010

2009

2008

2007

2006

2005

25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
2004

11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Chinese CO2 emission

(in millions of tonnes)
(left)
Safety & graphics sales
growth (right)
Chinese CO2 emission
growth (right)

2013

2011

2010

0%

Asia Pacific

Source: Bloomberg, British Petroleum Statistical

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

Figure 7: EMEA and Industrial segment sales growth,

and European construction confidence

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

increase the future

sustainable growth of
the euro area, but will
also raise expectations
of higher incomes and
encourage firms to
increase investment
today and bring forward
the economic recovery.
-ECB President Mario
Draghi on quantitative
easing programs in
Europe
(January 22, 2015)

Source: European
Central Bank website

-5%

-20

-10%

-25

-15%

-30

Europe,
Middle East
& Africa
(left)
Industrial
(left)

European
Construction
Confidence
Indicator
(right)

Source: Company reports, Bloomberg, European Commission

Source: Company reports, Bloomberg, European Commission

as this will not only

-15

Dec 14

European
Consumer
Confidence
Indicator (right)

-30
Dec 12

-10%

0%

Sep 14

-25

-10

Jun 14

-20

-5%

5%

Mar 14

-15

-5

Dec 13

0%

Consumer (left)

10%

Sep 13

-10

Jun 13

-5

5%

15%

Mar 13

Europe, Middle
East & Africa
(left)

Dec 12

Figure 6: EMEA and Consumer segment sales growth,

and European consumer confidence
10%

May 10, 2015

In the Eurozone, the European Central Bank (ECB) is implementing its quantitative easing program,
which is intended to lower interest rates and increase economic growth in Europe and thus
consumer spending and industrial growth. An increase in European consumer spending and
industrial growth will likely spur 3Ms Consumer and Industrial segments sales growth as it has in
the past (see figures 6 and 7 above). Quantitative easing is likely to increase consumer confidence
and industrial investments (see Mario Draghi quote to the left)
Foreign Exchange Exposure
As shown in figure 4, 63.5% of 3Ms revenues originate from outside of the United States. Within the
69 other countries 3M operates, the company is exposed to various foreign exchange gains and
losses. In todays economy, the United States dollar (USD) is strengthening against most all other
major foreign currencies (see figures 9, 10 and 11 on next page).
If this trend continues to prevail, 3M could suffer more foreign exchange (FX) conversion losses than
in 2014. In 2014, 3M had sales conversion losses of 2.2% in Asia-Pacific (APAC), 1.6% in Europe,
Middle East and Africa (EMEA), and 7.5% in Latin America & Canada which made for a total FX loss of
3.0% from foreign operating sales.
3M will incur losses on current investments in foreign countries given further FX depreciation
relative to the dollar, but new investments outside of the US will become increasingly attractive.
Also, to mitigate risks, CFO Nicholas C. Gangestad states that 3M has, a hedging strategy where
we hedge approximately 50% of our economic or P&L exposure. And we hedge that out in the past
for 12 months.

Figure 8: Brent crude oil price per barrel and the ICE US dollar index
$120
Brent
Crude
($/bbl)

$100
$80
$60

Source: Factset

Feb 15

Nov 14

Aug 14

May 14

Feb 14

Nov 13

Aug 13

May 13

$40

US
Dollar
Index

Fortunately for 3M, Chinese sales have minimal foreign

exposure risk due to the fact that the Peoples Bank of
China artificially pegs the Chinese Yuan to the dollar. Note
that in figure 9, the Chinese yuan fluctuates far less
relative to the USD than other Asia Pacific currencies.
Brent crude and the USD have correlation coefficient of
-0.631, so it can be said that in recent months 63.1% of
the dollars appreciation can be explained by the decline
in oil prices. Given that oil prices have stabilized, I do not
expect the dollar to appreciate as sharply as it has in
recent months.

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

Figures 9, 10 and 11: Historical quarterly sales growth of international segments

(in bold) and change in respective major foreign currencies (not in bold)
10%
Asia Pacific

5%

May 10, 2015

Figures 12, 13 and 14: Revenue

sources from countries in their
respective geographic segments
in 2014
Asia Pacific
China

0%

Indian Rupee

-5%
-10%

Chinese Yuan

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

Dec 12

-15%

10%
0%
-5%

6%

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

Dec 12

Dec 14

Sep 14

Jun 14

Mar 14

Dec 13

Sep 13

Jun 13

Mar 13

Dec 12

Canadian
Dollar

20%
10%

Operating
Margin
Expansion

0%

R&D % of sales
growth (t-1)

-10%

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

-20%

2006

2%

France
Other
Europe
Middle East
& Africa

Latin America & Canada

Brazil

3%
6%

Brazilian
Real

Canada

3%

Other
Latin
America

Source: Factset, Company reports

Figure 15: Historical annual operating margin expansion and one year
lagging R&D expenditures (% of sales) with 2015 and 2016 estimates (in
yellow)

Source: Company reports

Germany

3%

12%

Euro

Latin
America &
Canada

Source: Company reports

Other Asia
Pacific

Europe, Middle East & Africa

-15%

10%
5%
0%
-5%
-10%
-15%

Japan
India

3%
6%

British
Pound

-10%

12%

Japanese Yen

Europe,
Middle East
& Africa

5%

9%

Research & Development

Investments made in research and
development (R&D) provides 3M with
patents for new products and
improvements on existing products that
give the company a competitive advantage.
The firm states in its 10K that, ...no single
patent or group of related patents is in itself
essential to the Company as a whole or to
any of the Companys business segments.
At the J.P. Morgan, Transportation and
Industrials Conference, Chairman, President

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

& CEO Inge Thulin marks on R&D, we had an average investment of around 5.5% to 5.6% over
years and we decided to step that up to 6% as we move ahead. R&D is vital to 3Ms success. Over
the past 10 years, R&D investments made in the prior year help to expand 3Ms operating margin in
the following year because these new products have, at least initially, higher margins (see figure
15).
Over the past 15 years, R&D expenditures have made up an average of 5.6% of sales; R&D was 5.6%
of sales in 2014. Patents with finite lives total $581 million and make up 1.8% of total assets.
Enterprise Resource Planning (ERP) System
Since 2010, 3M has been implementing an ERP System. Traditionally the company has outsourced its
database systems for inventory and purchasing management. 3Ms ERP system will be fully
implemented in Europe by the end of 2015 and will be implemented in the United States by the end
of 2016.
3M will realize an advantage over
competitors since one unified ERP System
should reduce operating costs and working
capital. Management estimates there will be
an annual $600 million in operational savings
and a $500 million decrease in operating net
working capital (NWC). A decrease in NWC
will increase asset turnover, provide greater
liquidity (if the reduced inventory and
accounts receivable results in more cash), and
lower risk. Furthermore, risk is reduced from
having a better system which is more difficult
for hackers to gain access. A hacked system
could compromise supplier and customer
data, which could disrupt 3Ms supply chain
and tarnish its business reputation.

Figure 16: Historical and forward estimated net working

capital (as a percent of sales) and operating margin
25%
20%

Net
Working
Capital

15%

Operating
Margin

10%

2016e

2015e

2014

2013

2012

2011

5%

Source: Company reports

Financial Analysis
EPS Estimates
As shown in figure 17 below, I expect EPS to rise to $8.26 in 2015 and to $9.20 in 2016. The main
drivers of EPS growth are the gross margin expansion, operating margin expansion, Safety &
Graphics sales growth, Industrial sales growth, share buybacks and increasing R&D investments.
Figure 17: Quantification of 2015 and 2016 EPS Drivers

$0.17

$0.30
$0.06 $0.00 $0.12
$0.07
$0.04
$0.11 $0.08

$9.20

2016

Share Repurchases

SG&A

Gross Margin

Other

Consumer

Health Care

Electronics & Energy

Safety & Graphics

Industrial

$8.26

2015

Share Repurchases

$(0.01) $0.22

SG&A

Gross Margin

Other

Consumer

Health Care

Electronics & Energy

Safety & Graphics

Industrial

$0.04 $0.04 $0.00 $0.14

$7.63 $0.09 $0.07 $0.03

2014

$9.60
$9.20
$8.80
$8.40
$8.00
$7.60
$7.20

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

As discussed earlier, I predict top line growth in 3Ms industrial segment due to a predicted rise in
consumer confidence in Europe. I expect top line growth for Safety & Graphics in China, due to the
rise in demand for protective respirator masks. Both business segments have a high EBITDA margin
relative to the other business segments (see figure 18 below). With above company average sales
growth in these business segments, I anticipate EBITDA and operating margins to expand.
Figure 18: Historical and forward estimated EBITDA/Sales margins by business segments
40%
Electronics & Energy

35%

Consumer

30%

Industrial
Safety & Graphics

25%

Health Care

2016e

2015e

2014

2013

2012

2011

20%

3M Company

Source: Company reports

Source: Company reports

2016e

2015e

2014

2013

In 2014, I expect 3Ms share buyback program to add roughly $0.20 to EPS each year with a
cumulative $3 billion spent each year (see figure 19 below). Management has stated that share
repurchases will make up for 3.0% of EPS growth in 2015 and in 2016. My estimates are slightly
bearish relative to theirs as I predict repurchases will make up for 2.9% of EPS growth in 2015 and
2.1% in 2016.
I predict increased research and development
Figure 19: Historical and forward estimated
investments in new products will subtract from EPS in
share repurchases (in billions)
2015, but the benefits will be realized in 2016 as 3M
$4.0
benefits from with exclusive rights to sell certain
$3.5
products. Operating margin growth has a sensitivity of
$3.0
0.44 relative to prior-year R&D growth as a percent of
$2.5
sales.
$2.0
$1.5
Figure 20: My estimated EPS versus
$1.0
$0.5
consensus estimates
$0.0
FY 2015e
FY 2016e
Estimated
$
8.26
$
9.20
Consensus
$
8.21
$
9.00
Source: Factset

As seen in figure 20, my estimated EPS is bullish relative to consensus estimates. This is attributable
to my estimates for margin expansion, because my sales estimates are almost exactly in line with
consensus (see table on cover page).
Sales Projections
On the next page are sales and EBITDA estimates for each of 3Ms business segments. I project
Industrial to grow at 3.5% in 2015 and 3.0% in 2016 due to the nature of it being a mature industry
relative to the other segments. I predict Safety & Graphics to grow at 5.0% in 2015 and 4.0% in 2016
because of its growth potential in China and the amount of intellectual property associated with the

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

segment. Electronics & Energy is projected to grow at 2.0% in 2015 and 2016 because of the mature
industry of parts for computers, but the segment has a foothold on the market it is in, with many
patents on certain electrical components. I foresee Health Care growing at 3.0% in 2015 and 3.5% in
2016, due to the increasing demand for medical devices, and increasing demand for orthodontic
supplies in Europe and medical supplies in the United States. Although, new tax laws have been
enacted in the US that have increased taxes on medical technology sales.

Figure 21: Historical and forward estimated sales and EBITDA from each segment

2011
Industrial
Sales
%of total sales
Sales Growth
EBITDA
Safety & Graphics
Sales
%of total sales
Sales Growth
EBITDA
Electronics & Energy
Sales
%of total sales
Sales Growth
EBITDA
Health Care
Sales
%of total sales
Sales Growth
EBITDA
Consumer
Sales
%of total sales
Sales Growth
EBITDA
Other
Sales
%of total sales
Sales Growth
EBITDA
3M Company
Sales
%of total sales
Sales Growth
EBITDA
Source: Company reports

2012

9,629
32.5%

2,320

5,458
18.4%

1,488

5,732
19.4%

1,395

5,011
16.9%

1,683

4,230
14.3%

957

(449)
-1.5%

(429)

$ 29,611
100.0%
$

7,414

2013

2014

2015e

2016e

9,943
33.2%
3.3%
2,567

$ 10,584
34.3%
6.4%
$ 2,679

$ 10,990
34.5%
3.8%
$ 2,772

$ 11,375
34.5%
3.5%
$ 2,918

$ 11,716
34.4%
3.0%
$ 3,251

5,471
18.3%
0.2%
1,447

5,657
18.4%
3.4%
1,482

5,732
18.0%
1.3%
1,530

6,019
18.3%
5.0%
1,632

5,458
18.3%
-4.8%
1,292

5,393
17.5%
-1.2%
1,214

5,604
17.6%
3.9%
1,386

5,716
17.3%
2.0%
1,437

5,138
17.2%
2.5%
1,810

5,334
17.3%
3.8%
1,843

5,572
17.5%
4.5%
2,107

5,739
17.4%
3.0%
2,195

4,386
14.7%
3.7%
1,053

4,386
14.2%
0.0%
1,051

4,523
14.2%
3.1%
1,103

4,704
14.3%
4.0%
1,166

(492)
-1.6%
9.6%
(399)

(532)
-1.7%
8.1%
(233)

(600)
-1.9%
12.8%
(153)

(600)
-1.8%
0.0%
(369)

$ 29,904
100.0%
1.0%
$ 7,771

$ 30,822
100.0%
3.1%
$ 8,037

$ 31,821
100.0%
3.2%
$ 8,543

$ 32,952
100.0%
3.6%
$ 8,979

6,259
18.4%
4.0%
1,779
5,830
17.1%
2.0%
1,528
5,940
17.5%
3.5%
2,416
4,892
14.4%
4.0%
1,256
(600)
-1.8%
0.0%
(369)

$ 34,038
100.0%
3.3%
8
$ 9,861

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Although there is rising demand for various medical supplies in developed markets, I foresee foreign
exchange exposure removing the upside from organic local currency sales growth. Consumer
segment sales are expected to grow 4.0% in 2015 and 2016 due to rising consumer confidence in
Europe and a strong presence in the United States. Other is simply held constant in regard to sales
growth.
DuPondt Analysis
Figure 22: 5-Stage DuPondt Analysis
5-Stage DuPondt Analysis
EBIT / sales

2011

2012

2013

2014

2015e

2016e

20.9%

21.7%

21.6%

22.4%

22.8%

23.9%

EBT/EBIT
Net income (cont) /EBT

0.96
0.98
72.2%

0.91
0.98
71.0%

0.92
0.98
71.9%

0.98
0.98
71.1%

1.02
0.99
71.1%

0.99
0.99
71.1%

ROA

14.1%

13.8%

14.0%

15.4%

16.2%

16.6%

1.94

1.93

1.87

2.08

2.35

2.34

27.3%

26.6%

26.2%

32.2%

38.0%

38.9%

Sales / avg assets

Avg assets / avg equity

ROE
Source: Company reports

In my 5-stage DuPondt analysis, I have the EBIT margin increasing due to the strength of sales
growth in more profitable segments and 3Ms ERP system implementation. Furthermore, with the
implementation of its ERP system, 3M will benefit from a higher asset turnover as net working
capital decreasesI expect assets to increase relative to equity due to 3Ms share buyback program
increasing the treasury stock account balance. ROE will therefore increase by 5.8% in 2015 and 0.7%
in 2016. It is also important to note that 3Ms Debt/EV and ROE is respectively 3.6% and 32.2% while
the industrys Debt/EV and ROE are respectively 13.6% and 14.9%.
Figure 23: Cash flow statement with forward year projections
Cash Flow Statement
Items

2011

2012

2013

2014

2015e

2016e

$4,283

$4,444

$4,659

$4,956

$5,210

(884)

(183)

403

231

(97)

84

$3,399

$4,261

$5,062

$5,187

$5,113

$5,723

($1,070)

($596)

($321)

$668

($1,397)

($911)

($725)

($461)

$642

$775

$0

$0

($1,795)

($1,057)

$321

$1,443

($1,397)

($911)

Cash from Operations

Net income
Change in NWC
Cash from operations

$5,639

Cash from Investing

Change in Net PP&E
Change in Marketable Securities
Cash from investing
Cash from Financing
Change in Debt
Change in Other liabilities
Change in Par and Paid in Capital
Change in OCCI
Change in Other Equity

($286)

$835

$8

$828

$841

$850

1962

(1109)

(942)

1620

299

277

331

265

282

(1482)

275

837

(2376)

1585

88

23

(19)

(413)

Share Buyback

(1413)

(728)

(2978)

(3922)

(3015)

(2930)

Dividends

(1555)

(1635)

(1730)

(2216)

(2659)

(2819)

(375)

(478)

(1192)

(839)

($2,762)

($2,540)

($5,685)

($7,314)

($2,984)

9
($4,618)

(1158)

664

(302)

(684)

733

194

Change in Retained Earnings

Cash from financing
Change in Cash

Source: Company reports

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Cash Flow Analysis

3Ms operating income pays for dividends and share repurchases every year. I assumed that 3M will
take out a small amount of debt, due to interest rates being at 40 year lows, to pay off old higher
cost debt and use to invest in new capital and make acquisitions.
See figure 23 on the previous page for a detailed breakdown of 3Ms cash flows. Please note in
figure 23 that depreciation and amortization have been added to operating cash flows and instead
have been added to investing cash flows. Furthermore, under financing cash flows, dividends and
share buybacks have been made separate from the change in retained earnings line item.
Credit Analysis
3Ms market value of debt to EBITDA is 0.79, which means that 3M can pay off its outstanding loans
with less than one years worth of cash flow from operations. Its long-term debt to enterprise value
is 3.6% where other comparable industrial conglomerates have an average LT debt/EV of 13.6%. The
company has a relatively low risk of default on its debt. The rating on long-term debt is AA- credit
from Standard & Poors and Aa3 from Moodys Investors Service. Both ratings from each agency are
equal in measurement of credit risk and indicate that 3M has very low risk, investment grade bonds.

Valuation
Based on two different valuation metrics, I derived with a target price of $172.00.
Relative Valuation
For the first valuation metric, I compared 3M to other industrial conglomerates using price/sales
versus net profit margin and price/book value versus return on equity. See figures 24 and 25 below
for a regression analysis of industrial conglomerates and see figure 24 on the next page to view 3Ms
historical P/S and P/B.
Figure 24: Exponential regression of 3M and its
comps (P/S versus net profit margin in 2014)

Figure 25: Quadratic regression of 3M

and its comps (P/B versus ROE in 2014)

PHG

UTX
OTTR

Source: Factset, Company reports

20%

15%

10%

5%

0%

-5%

Net Profit Margin

DHR

GE

PHG
OTTR

UTX

TXT

0
ROE

40%

IEP

IEP

30%

CSL

GE
TXT

ROP

20%

DHR

HON

HON

10%

MMM

3
CSL

MMM

6
P/B

P/S

ROP

R = 0.9467

y = 48.042x2 - 0.7517x + 1.9447

R = 0.9204

0%

y=

0.6056e11.097x

-10%

Source: Factset, Company reports

10

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Figure 26: Historical price to sales and price to book of 3M

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

9.0
7.5
6.0
Price/Sales (left)

3.0

Price/Book (right)

1.5

2014

2013

2012

2011

2010

2009

2008

2007

2006

0.0
2005

3Ms 10 year
historical average P/S
is 2.5 and P/B is 4.8

4.5

Source: Company reports

It can be seen in figure 26 that 3Ms P/S multiple is high relative to its historical average, but relative
to its comps (see figure 24 on previous page) it is fairly valued based on its net profit margin (NPM).
Also, the companys P/B is at a historical high and relative to other industrial conglomerates (see
figure 25 on previous page) it is also fairly valued based on its above-average low leveraged ROE. The
R2 value of the quadratic relationship between P/B and ROE is 0.92 where the R2 value of the
exponential relationship between P/S and NPM is 0.95. These two R 2 values mean that we can
conclude 92% of a change in P/B can be explained by a change in ROE, and 95% of a change in P/S
can be explained by a change in NPM.
Based on the regression analyses in figure 24, figure 25, and my terminal NPM and ROE estimates, I
have concluded 3Ms terminal P/S multiple to be 3.8 and its P/B multiple to be 8.9. This will be highly
relevant later on in the discounted cash flow analysis section of this report.
Discounted Cash Flow Analysis
In the first stage of the discounted cash flow (DCF) analysis, I find the present value of the next two
forward years free cash flow to equity (FCFE). This is done by forecasting net operating profit after
tax (NOPAT) minus change invested capital (IC) minus after-tax interest. Change in IC is found from
change in net working capital (NWC) and change in net fixed assets (NFA). FCFE is then multiplied by
a discount factor using the cost of equity. The cost of equity calculation is found using the capital
asset pricing model (CAPM). I calculated a trailing 10 year beta for 3M versus the market (S&P 500
stock index) based on monthly returns. All CAPM calculations can be seen below in figure 27.
Figure 27: CAPM assumptions, equation (top right), and discount factor calculation (bottom right)

Cost of equity
Risk free rate
Beta
Market return
Market risk premium
Stock risk premium
3M expected return

2.0%
1.09
10.0%
8.0%
8.7%
10.7%

E(r)MMM = E(r)rf + (E(r)S&P 500 - E(r)rf)

Discount factor = (1 + E(r)MMM)

-t

11

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

The second stage of the DCF analysis is the same as the first, but I ultimately assume a terminal
growth rate for all line items. See figure 28 below for a detailed explanation of the first and second
DCF steps. I assume 3.5% and 4.0% sales growth in 2017 and 2018, which will then pick up to 5% in
2019 and 6% in 2020 and 2021 as the world economies recover. Growth in working is less than sales
in early years due to the new ERP system; however, net fixed asset growth is higher as the firm
potentially engages in acquisitions. After-tax interest expense is projected to grow 7% per year, as
the firm takes advantage of lower cost debt, and shares are expected to decline in 2017 and 2018 as
the firm continues with its buyback programs.
Figure 28: Present value of free cash flow to equity per share

Line Items
Cash flows
Sales

First Stage
2015
2016
$32,952 $34,038

Growth

NOPAT
% of sales

- Change in NWC
NWC EOY

- Chg NFA
NFA EOY
Growth NFA
S / NFA (EOY)

Total inv in op cap

Total net op cap

3.3%

3.5%

4.0%

5.0%

6.0%

6.0%

$5,338

$5,775

$5,977

$6,216

$6,527

$6,919

$7,334

16.2%

17.0%

17.0%

17.0%

17.0%

17.0%

17.0%

97 $

(84) $

$ 3,447

$ 3,363

10.5%

-2.4%
9.9%

Growth NWC
NWC / S (EOY)

Second Stage
2017
2018
2019
2020
2021
$35,229 $36,638 $38,470 $40,778 $43,225

$ 1,397 $
$ 19,971
1.65

67 $

$ 3,430

103 $

212 $

225 $

238

$ 3,533

$ 3,745

$ 3,969

$ 4,208

3.0%
9.7%

6.0%
9.7%

6.0%
9.7%

6.0%
9.7%

2.0%
9.7%

911 $ 1,462 $ 1,341 $ 1,421 $ 1,506 $ 1,597

$ 20,882 $ 22,344 $ 23,684 $ 25,105 $ 26,612 $ 28,209

4.6%
7.0%
6.0%
6.0%
6.0%
6.0%
1.63
1.58
1.55
1.53
1.53
1.53

$ 1,494 $ 827 $ 1,529 $ 1,444 $ 1,633 $ 1,731 $ 1,835

$23,418 $24,245 $ 25,774 $27,217 $28,850 $30,581 $32,416

S / IC (EOY)
ROIC (EOY)

FCFF
% of sales
Growth

- Interest (1-tax rate) $

1.41
22.8%

1.40
23.8%

1.37
23.2%

1.35
22.8%

1.33
22.6%

1.33
22.6%

1.33
22.6%

$3,844

$4,948

$4,448

$4,773

$4,894

$5,188

$5,499

11.7%

14.5%
28.7%

12.6%
-10.1%

13.0%
7.3%

12.7%
2.5%

12.7%
6.0%

12.7%
6.0%

77 $

Growth

86 $

93 $

99 $

106 $

113 $

121

11.6%

7.0%

7.0%

7.0%

7.0%

7.0%

$3,766

$4,862

$4,356

$4,674

$4,788

$5,074

$5,378

% of sales
Growth

11.4%

14.3%
29.1%

12.4%
-10.4%

12.8%
7.3%

12.4%
2.4%

12.4%
6.0%

12.4%
6.0%

/ No Shares

630.7

612.7

600.5

594.5

594.5

594.5

594.5

-2.9%

-2.0%

-1.0%

0.0%

0.0%

0.0%

$7.93

$7.25

$7.86

$8.05

$8.54

$9.05

32.9%

-8.6%

8.4%

2.4%

6.0%

6.0%

0.82
$6.47

0.74
$5.34

0.67
$5.23

0.60
$4.84

0.54
$4.63

0.49
$4.43

FCFE

Growth

FCFE per share

$5.97

Growth

* Discount factor
Discounted FCFE

0.90
$5.39

12

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

In the third stage of the DCF valuation, I used a terminal P/S multiple of 3.8 and terminal P/B
multiple of 8.9. I took the terminal sales per share value, multiplied by the terminal P/S, multiplied
by the 2021 discount factor and derived the discounted share value. Using the same methodology, I
calculated a different terminal share value using the terminal P/B, terminal book value and the same
discount factor. The details of this third step are broken down in figures 29 and 30 below.
Figure 29: Terminal value of future sales

Third Stage (P/S Valuation)

2015
2016
2017
2018
2019
2020
2021
$32,952 $34,038 $35,229 $36,638 $38,470 $40,778 $43,225

Terminal value P/S

Sales
Growth
Net profit margin

15.8%

3.3%
16.6%

3.5%
16.7%

4.0%
16.7%

5.0%
16.7%

6.0%
16.7%

Terminal P/S
* Terminal SPS
Terminal value
* Discount factor
Discounted terminal
share value

6.0%
16.7%

3.82
$72.71
$277.53
0.49
$136.06

Figure 30: Terminal value of future book value

Terminal value P/B
Book value
Growth
ROE (EOY book)

2015
$14,528
35.9%

Third Stage (P/B Valuation)

2016
2017
2018
$14,699 $14,993 $15,443
1.2%
38.4%

2.0%
39.2%

3.0%
39.6%

2019
$16,370

2020
$17,352

2021
$18,393

6.0%
39.2%

6.0%
39.2%

6.0%
39.2%

Terminal P/B
* Terminal BPS
Terminal value
* Discount factor
Discounted terminal
share value

8.92
$30.94
$276.05
0.49
$135.33

Through the 3 steps of the DCF, I derived a target share value for 3M of $172.41 based on P/S and
$171.68 based on P/B. The components of each step are summarized below in figure 31.
Figure 31: 3M 2015 share value derived based on P/S and P/B

First stage
Second stage
Third stage
Third stage
Value (P/S)
Value (P/B)

$11.87
$24.48
$136.06
$135.33
$172.41
$171.68

Summary
Present value of first 2 year cash flow
Present value of year 3-7 cash flow
Present value of terminal value P/S
Present value of terminal value P/B
= value at beg of fiscal yr
2015
= value at beg of fiscal yr
2015

13

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Figure 32 below shows a detailed summary of 3M and other industrial conglomerates financial info.
Figure 32: Comps sheet
Ticker
MMM
DHR
GE
HON
IEP
UTX
OTTR
PHG
CSL
ROP
TXT
IR
Average
Median

Name
3M CO
DANAHER CORP
GENERAL ELECTRIC CO
HONEYWELL INTERNATIONAL INC
ICAHN ENTERPRISES LP
UNITED TECHNOLOGIES CORP
OTTER TAIL CORP
KONINKLIJKE PHILIPS NV
CARLISLE COS INC
ROPER TECHNOLOGIES INC
TEXTRON INC
INGERSOLL-RAND PLC

SPX

S&P 500 INDEX

Ticker
MMM
DHR
GE
HON
IEP
UTX
OTTR
PHG
CSL
ROP
TXT
Average
Median

Website
http://www.3m.com
http://www.danaher.com
http://www.ge.com
http://www.honeywell.com
http://www.ielp.com
http://www.utc.com
http://www.ottertail.com
http://www.philips.com
http://www.carlisle.com
http://www.roperind.com
http://www.textron.com

Current
Price
$160.60
$84.03
$27.36
$102.12
$90.66
$118.43
$27.73
$27.66
$98.17
$172.34
$45.19
$67.44

Market
Value
$101,875
$59,453
$275,677
$79,828
$11,161
$105,427
$1,036
$25,188
$6,370
$17,295
$12,547
$17,845

Enterprise
Value
$105,692
$60,190
$548,698
$83,337
$11,186
$123,791
$1,546
$29,423
$6,389
$18,899
$15,684
$21,717

$2,116
2014
ROE
34.1%
13.0%
15.3%
23.8%
-4.1%
21.2%
11.8%
10.7%
11.2%
13.5%
13.6%

2014
P/B
7.32
2.87
2.54
4.55
2.05
3.68
1.80
2.06
2.88
3.63
2.86

2013
23.9
24.6
16.7
20.5
10.0
19.1
18.0
13.1
27.2
30.5
25.8

14.9%
13.5%

3.29
2.87

20.9
20.5

3.6%
1.2%
49.8%
4.2%
0.2%
14.8%
33.0%
14.4%
0.3%
8.5%
20.0%
17.8%

EBITDA
$8,543
$4,541
$38,579
$7,353
$1,611
$10,889
$160
$3,147
$515
$1,200
$1,555
$1,753

1 day
1.3
1.0
1.2
1.1
(1.0)
2.1
0.6
(1.6)
0.7
2.0
1.1
0.4
0.8
1.1

1 Mo
(3.4)
(1.5)
9.4
(1.7)
0.8
0.5
(13.2)
(6.0)
5.3
1.5
(1.4)
(0.1)
(0.9)
(1.4)

Price Change
3 Mo 6 Mo
(3.3) 2.6
(0.9) 3.5
11.6 3.6
0.4
5.5
(9.7) (13.4)
(1.2) 8.6
(10.8) (10.4)
(1.4) 0.2
4.4
10.6
7.0
8.9
3.8
7.9
1.3
6.2
(0.0) 2.5
(0.9) 3.6
2.9

1.3

1.6

2014
21.4
22.1
16.6
19.2
-49.8
17.4
15.3
19.2
25.6
26.8
21.0

P/E
2015E
20.2
19.6
19.3
16.8
16.0
16.9
15.8
18.6
20.5
25.1
18.1

TTM
21.3
23.3
289.5
18.7
-29.4
16.7
21.9
58.7
25.4
26.6
19.7

NTM
19.7
19.3
19.9
16.4
16.0
16.8
18.1
19.3
24.5
16.9

4.1
2014
2016E NPM
18.3 14.9%
17.9 13.5%
16.8 11.2%
15.3 10.3%
14.8 -1.2%
15.4 9.3%
14.7 8.5%
15.3 4.6%
17.2 7.8%
22.9 18.2%
15.3 4.3%

14.1
19.2

18.8
18.6

44.8
21.9

18.7
18.7

16.7
15.4

9.2%
9.3%

52 Wk
14.0
14.7
3.5
9.9
(10.1)
1.2
(2.8)
(13.3)
17.1
22.5
16.8
14.5
6.7
9.9

YTD
(2.3)
(2.0)
8.3
2.2
(2.0)
3.0
(10.4)
(4.6)
8.8
10.2
7.3
6.4
1.7
2.2

12.8
2014
P/S
3.20
2.99
1.85
1.98
0.59
1.62
1.30
0.89
1.99
4.87
0.90

2.8
2015
3.07
2.89
2.11
2.03
0.64
1.62
1.29
1.00
1.73
4.71
0.88

2.02
1.85

2.00
1.73

8.5

NTM
8.0%
20.5%
1358.4%
14.2%
-283.9%
-0.4%

24.5
51.8
13.4
9.3
10.4
16.1
9.3

224.5%
31.6%
8.4%
16.5%
15.7%
139.8%
15.4%

Earnings Growth
2014
2015E
11.5%
6.3%
11.4%
12.6%
0.6%
-13.9%
7.2%
14.3%
-120.1% -410.4%
9.8%
2.5%
17.5%
-2.8%
-31.8% 3.5%
6.1%
24.8%
13.6%
7.0%
22.9%
16.3%
24.7%
13.5%
-4.7%
-30.9%
9.8%
6.3%

OM
22.6%
17.8%
14.8%
16.5%
4.2%
13.9%
12.2%
5.1%
12.7%
28.6%
8.0%

ROIC
23.7%
9.9%
3.7%
17.7%
-2.3%
12.4%
5.7%
1.6%
8.8%
9.5%
7.7%

7.6%
EV/
EBIT
15.9
17.2
19.6
12.7
13.4
13.5
16.1
19.2
14.4
17.3
13.6

1.7%
P/CF
Current
15.7
16.3
11.2
16.6
18.7
11.7
8.9
43.6
18.6
19.0
10.6

12.6%
P/CF
5-yr
13.5
14.4
8.2
13.8
12.7
11.8
6.7
10.0

14.2%
13.9%

8.9%
8.8%

15.7
15.9

17.4
16.3

LTG
8.9
11.9
7.8
9.2

Beta
1.26
1.09
1.56
0.79
1.02
1.02
1.52
1.52
1.00
0.56
1.45

LT Debt/
Equity
46.4%
13.1%
254.0%
32.3%
62.2%
62.2%
36.2%
36.2%
33.9%
54.5%
86.8%

1.16
1.09

65.2%
46.4%

2016E
10.6%
9.3%
14.8%
9.7%
8.7%
9.7%
7.4%
21.5%
19.7%
9.8%
18.4%
16.9%
12.7%
9.8%

Pst 5yr
10.7%
16.0%
8.2%
13.3%

1.00
Sales Growth
NTM
STM
-0.4%
3.2%
-11.4%
-0.5%
-9.9%
5.7%
1.9%

10.6%
17.2%
-2.9%
10.3%
19.9%
21.1%
11.5%
10.7%

5.5%

16.4
7.7

-3.4%
17.2%
3.8%
2.4%

11.5
12.2

0.3%
0.7%

5.6%
5.6%

Source: Factset, Company reports

Sum-Of-Parts Analysis
Although there are many other industrial conglomerates besides 3M, there are no industrial
conglomerates that are directly comparable to 3M. The company has many niche businesses that
make it hard to compare to other conglomerates with operating segments largely made up of
businesses in which 3M does not operate.
To gain a better understanding of how the company should be valued, I used a sum-of-parts analysis,
which separately compares each of 3Ms five business segments to companies that conduct in the
same type of operations. . Displayed in figure 33 on the next page are EV and EBITDA valuation
metrics of 3Ms business segments relative to their respective comps. This gives a depiction of how
each segment can be valued relative to their industry. I used EBITDA as the metric because it shows
how much cash is generated from operations by each business. Furthermore, only sales, EBIT and
depreciation & amortization metrics are provided for segments in 3Ms company reports.
To determine the value of each division, I analyzed the average EV/EBITDA multiples of comps and
adjusted them for a couple considerations. First, I adjusted the multiples for my forecast of future
valuations. Second, I considered MMM's profitability of its segments versus the comps; however, the
relationship was weak. I also varied the multiples (min and max) to determine a range of valuations.
3Ms Other segment had no comparable companies so I simply used the average EV/EBITDA
multiple of industrial conglomerates.

14

Pst 5yr
6.6%
12.2%
-0.9%
5.5%
20.3%
4.4%
-4.8%
-2.7%
6.1%
11.6%
5.7%
5.8%
5.7%

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Figure 33: Current year and forward year EV, EBITDA and EV/EBITDA
of companies comparable to each of 3Ms business segments
Ticker
MMM
AVY
FUL
DORM
DLPH
SHW
MAS
HUN
DOW
Average

EV
$32,926
$6,171
$2,793
$1,662
$27,371
$29,230
$11,533
$10,074
$79,288

Ticker
MMM
UNF
MSA
CTAS
GWW
Average

EV
$18,174
$2,089
$1,849
$10,324
$17,136

Ticker
MMM
AXE
COMM
TEL

EV
$16,463
$3,431
$7,632
$31,453

GLW
Average

$27,196

Ticker
MMM
BSX
MDT
SYK
ZMH
Average

EV
$25,027
$27,139
$107,818
$35,001
$18,922

Ticker
MMM
GK
KMB
CTAS
MAS
Average

EV
$13,102
$1,628
$47,744
$10,324
$11,533

EBITDA

EBITDA1
$2,772
$744
$221
$153
$2,578
$1,497
$1,037
$1,280
$8,434
$1,993

$21,015

EBITDA

EBITDA1
$1,530
$265
$174
$802
$1,632
$718

$7,849

$
$
$
$
$
$
$
$

EBITDA

$
$
$
$

EBITDA1
$1,386
$405 $
$868 $
$2,752 $
$3,027 $
$1,763

$17,428

EBITDA

EBITDA1
$2,107
$1,570
$5,780
$2,576
$1,740
$2,916

$47,220

EBITDA

$17,807

$
$
$
$

EBITDA1
$1,103
$127
$3,980
$802
$1,037
$1,487

$
$
$
$

Industrials
EBITDA2
$2,918
709 $
283 $
166 $
2,583 $
1,808 $
1,095 $
1,416 $
8,901 $
$2,120

$3,251
755
316
190
2,920
2,030
1,226
1,658
9,656
$2,344

Safety & Graphics

EBITDA2
$1,632
268 $
175 $
869 $
1,610 $
$731

$1,779
284
205
940
1,734
$791

Electronics & Energy

EBITDA2
$1,437
328 $
782 $
2,704 $

$1,528
360
828
2,878

8.5x
8.8x
11.4x

10.5x
9.8x
11.6x

9.5x
9.2x
10.9x

3,599 $
$1,853

3,598
$1,916

9.0x
9.4x

7.6x
9.9x

7.6x
9.3x

Health Care
EBITDA2
$2,195
1,942 $
7,182 $
2,721 $
2,074 $
$3,480

$2,416
2,178
9,562
2,878
2,332
$4,237

Consumer
EBITDA2
$1,166
144 $
4,080 $
869 $
1,095 $
$1,547

$1,256
157
4,295
940
1,226
$1,654

EV/EBITDA

EV/EBITDA1
8.3x
12.6x
10.8x
10.6x
19.5x
11.1x
7.9x
9.4x
11.3x

EV/EBITDA

EV/EBITDA2
8.7x
9.9x
10.0x
10.6x
16.2x
10.5x
7.1x
8.9x
10.2x

EV/EBITDA1
7.9x
10.6x
12.9x
10.5x
10.5x

EV/EBITDA

EV/EBITDA2
7.8x
10.5x
11.9x
10.6x
10.2x

EV/EBITDA1

EV/EBITDA
17.3x
18.7x
13.6x
10.9x
15.1x

EV/EBITDA2
14.0x
15.0x
12.9x
9.1x
12.7x

EV/EBITDA1
12.8x
12.0x
12.9x
11.1x
12.2x

7.3x
9.0x
11.0x
9.9x
9.3x

EV/EBITDA2

EV/EBITDA1

EV/EBITDA

8.2x
8.8x
8.8x
9.4x
14.4x
9.4x
6.1x
8.2x
9.2x

12.5x
11.3x
12.2x
8.1x
11.0x

EV/EBITDA2
11.3x
11.7x
11.9x
10.5x
11.4x

10.4x
11.1x
11.0x
9.4x
10.5x

Source: Factset, Company reports

15

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Figure 34: Present value of enterprise value for each operating segment
and implied EV/EBITDA multiple for the whole company

2015 min

2015 max

2015 avg

2016 min

2016 max

2016 avg

Industrial
Industrial Enterprise
value

$ 29,176

$ 35,012

$ 32,094

$ 32,094

$ 37,929

$ 35,012

$ 18,763

$ 22,026

$ 20,394

$ 14,373

$ 17,248

$ 15,811

$ 30,729

$ 35,119

$ 32,924

$ 12,831

$ 14,580

$ 13,706

Safety & Graphics

Safety & Graphics
Enterprise value

$ 16,316

$ 19,579

$ 17,947

Electronics & Energy

Electronics & Energy
Enterprise value

$ 12,936

$ 15,811

$ 14,373

Health Care
Health Care
Enterprise value

$ 31,827

$ 36,216

$ 34,022

Consumer
Consumer Enterprise
$ 12,831
value

$ 14,580

$ 13,706

Other
Other Enterprise
value

$ (4,132) $ (4,870) $ (4,501) $ (3,800) $ (4,538) $ (4,169)

3M Company

3M Company
Enterprise value

$ 98,954

Implied EV/EBITDA

$ 116,328

11.0x

Figure 35: Inputs used in sensitivity table

Debt
Preferred
Stock
Cash
Minority
Interest
Investments
Outstanding
Shares

2014
6,731 $

2015e
7,678 $

2016e
8,528

$0
1,897 $

$0
2,630 $

$0
2,824

$
$

33 $
1,556 $

33 $
1,556 $

33
1,556

649.2

630.7

13.0x

$ 107,641
12.0x

$ 104,990
10.6x

$ 122,365
12.4x

$ 113,678
11.5x

The implied EV/EBITDA is the sum of each of the forecasted

segments and divided that sum by the forecasted EBITDA of the
entire company.
After finding an EV/EBITDA multiple for the whole company, I
created a sensitivity table for 2015 and 2016 based on my
forecasts for the future values of 3Ms market value of long-term
debt, cash account balance, minority interest, investments and
outstanding number of common shares. See figure 33 to the left
for forecasted values.

See figures 36 and 37 on the next page to view the sensitivity

612.7 table on the company as a whole.

16

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

10.0x
11.0x
12.0x
13.0x
14.0x

$
$
$
$
$
$

7,979
120.92
133.57
146.22
158.87
171.53

-25%
-17%
-9%
-1%
7%

$
$
$
$
$
$

8,479
128.85
142.29
155.74
169.18
182.62

EBITDA 2015
$ 8,979 $
$ 136.78 $
$ 151.01 $
$ 165.25 $
$ 179.49 $
$ 193.72 $

9,479
144.70
159.73
174.76
189.79
204.82

$
$
$
$
$
$

% upside/downside
-20%
-15%
-10%
-11%
-6%
-1%
-3%
2.9%
9%
5%
12%
18%
14%
21%
28%

Figure 37: Sensitivity table for 2016 (above) and percent

upside/downside from current share price (below)

9,979
152.63
168.45
184.28
200.10
215.92

EV/EBITDA

EV/EBITDA

Figure 36: Sensitivity table for 2015 (above) and percent

upside/downside from current share price (below)

May 10, 2015

-5%
5%
15%
25%
34%

9.5x
10.5x
11.5x
12.5x
13.5x

$
$
$
$
$
$

8,861
130.56
145.02
159.49
173.95
188.41

-19%
-10%
-1%
8%
17%

$
$
$
$
$
$

9,361
138.32
153.59
168.87
184.15
199.43

EBITDA 2016
$ 9,861 $
$ 146.07 $
$ 162.16 $
$ 178.26 $
$ 194.35 $
$ 210.44 $

10,361
153.82
170.73
187.64
204.55
221.46

% upside/downside
-14%
-9%
-4%
1%
5%
11%
15%
21%
24%
31%

$
$
$
$
$
$

10,861
161.57
179.30
197.02
214.75
232.48

-4%
6%
17%
27%
38%

1%
12%
23%
34%
45%

Between the two target prices shown in figures 36 and 37, I took an equal weighted average
between the two and acquired a target share price of $171.75
Summary
The target share price derived from the discounted cash flow valuation is $172.05 and the target
share price derived from the sum of parts valuation is 171.75. After taking an equal weighted
average between the two, I come to my final target share price of $172.00.

Business Risks
Although my estimated target price is 7.1% above 3Ms current share price, there are some factors
that may disrupt the companys forecasted success:
1. Foreign currency exposure
2. Introduction of new products
3. Natural disasters
4. International economic conditions
5. Insider management
6. New tax laws
Foreign Currency Exposure
As stated in the business drivers section, 3Ms success is heavily reliant upon relatively low foreign
exchange volatility. Since 1999, 3M has hedged out 50% of all revenues exposed internationally, but
if the dollar continues to appreciate relative to other currencies like it has in the past 6 months, 3M
is extremely vulnerable and will have a difficult time generating sales growth in its non-US
geographic segments.
Introduction of New Products
For 3M to be able to benefit from high operating margins and sales growth, it is required to
introduce new products into the marketplace. If there are any difficulties or delays in product
development, such as being unable to gain acceptance of newly introduced products or the inability
to obtain intellectual property, certain products may prove to be commercially unsuccessful.

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INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Unsuccessful products or entirely unsuccessful businesses invested in by 3M may end up taking

away from operating profits and sales growth.
Natural Disasters
Natural disasters around the world are infrequent but are inevitably bound to happen. Given that
3M operates in over 70 different countries, natural disasters may disrupt global supply chains in
place if a natural disaster were to occur in a part of the world relevant to 3M. Suppliers and/or
customers of the company could be damaged or eliminated by a natural disaster, possibly leaving
3M with a surplus of finished products or a shortage of raw materials.
International Economic Conditions
As stated above, a shortage of raw materials may increase direct costs when purchasing scarce raw
materials at a premium or could cause 3M to have trouble meeting customer needs. 3M has a
process to minimize volatility in unfinished component and raw material pricing, but there is never a
clear guarantee that the company will be able to successfully manage price fluctuations in necessary
supplies.
Management
Inge G. Thulin has been CEO of 3M since 2012 and is now President and Chairman of the Board of
Directors as well. Given that he is an insider and manages the company, there could be a potential
conflict of interest between his goals and the goals of the shareholders. Although, it is important to
note that Mr. Thulin owns roughly 102,000 shares of the company (more than any other insider). It is
important to note this due to fact that because he is a large shareholder in the company, his goals
may more accurately align with shareholders goals. Furthermore, in the three years Mr. Thulin has
been CEO, 3Ms share price has had 21.6% year-over-year share price growth.
New Tax Laws
3M is at risk if the tax laws within the United States or abroad change unfavorably. President Obama
is suggesting a 19% corporate tax rate on revenue generated outside of the United States even if it is
kept within the country where the revenue was earned. This could impact 3M negatively because
the tax laws currently in the United States do not tax American corporations revenue that is made
outside of the US as long as the revenue is not brought back to the companies American bank
accounts.
Furthermore, as stated in the financial analysis section of this report, recent laws have been enacted
that impose taxes on medical technology sales. This will impact 3Ms top line growth in its Health
Care segment for all medical technology sales in the US.

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INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Appendix 1: SWOT Analysis

SWOT ANALYSIS
Internal origin

Helpful

Harmful

Strengths

Weaknesses

Globally diversified

Insider management

Diversified products

Large business to manage

Intellectual property

Poor R&D investments

Share buybacks

Unfavorable M&A

External origin

Established supply chain

Opportunities

Threats

Developed markets

Natural disasters

Emerging markets

Foreign exchange volatility

Acquisitions in key areas

Unfavorable economic conditions

Healthcare growth in US

Commodity price volatility

Environmental regulations

Appendix 2: Porter five forces analysis

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INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Appendix 3: Income statement

2010
Sales

Income Statement
2011
2012
2013

2014

2015e

2016e

$26,662 $29,611 $29,904 $30,871 $31,821 $32,952 $34,038

Growth

11.1%

1.0%

3.2%

3.1%

3.6%

3.3%

Direct Costs

13,831

15,693

15,685

16,106

16,447

16,905

17,359

Gross Margin

12,831

13,918

14,219

14,765

15,374

16,048

16,678

SG&A

5,479

6,170

6,102

6,384

6,469

6,567

6,518

R&D

1,434

1,570

1,634

1,715

1,770

1,977

2,042

EBIT

5,918

6,178

6,483

6,666

7,135

7,503

8,118

4.4%

4.9%

2.8%

7.0%

5.2%

8.2%

163

147

132

104

109

109

122

EBT

5,755

6,031

6,351

6,562

7,026

7,395

7,997

Taxes

1,592

1,674

1,840

1,841

2,028

2,134

2,308

Continuing income

4,163

4,357

4,511

4,721

4,998

5,260

5,689

Growth

Interest

Other
Net income

78

74

67

62

42

50

50

4,085

4,283

4,444

4,659

4,956

5,210

5,639

4.8%

3.8%

4.8%

6.4%

5.1%

8.2%

Growth

Source: Company reports

20

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Appendix 3: Balance Sheet

Operating Assets

2010

Balance Sheet
2011
2012

2013

2014

2015e

2016e

2,630

2,824

12,112

12,353

(15,085)

(15,718)

Cash

3,377

2,219

2,883

2,581

1,897

Accounts receivable

3,615

3,867

4,061

4,253

4,238

Inventory

3,155

3,416

3,837

3,864

3,706

967

1,277

1,201

1,279

1,298

11,114

10,779

11,982

11,977

11,139

Goodwill

6,820

7,047

7,385

7,345

7,050

Intangible assets

1,820

1,916

1,925

1,688

1,435

20,253

21,166

22,525

23,068

22,841

(12,974)

(13,500)

(14,147)

(14,416)

(14,352)

Other LT assets

1,336

1,696

1,233

1,557

1,600

Net Fixed Assets

17,255

18,325

18,921

19,242

18,574

19,971

20,882

1,787

2,512

2,973

2,331

1,556

1,556

1,556

$30,156

$31,616

$33,876

$33,550

$31,269

$33,639

$34,791

1,662

1,643

1,762

1,799

1,807

Accrued payroll

778

676

701

708

732

Accrued income taxes

358

355

371

417

435

Other current liabilities

2,022

2,085

2,281

2,891

2,918

Total operating liabilities

4,820

4,759

5,115

5,815

5,892

6,036

6,166

Long-term debt

$5,452

$5,166

$6,001

$6,009

$6,837

$7,678

$8,528

Other LT liabilities

3,867

5,829

4,720

3,778

5,398

5,398

5,398

Total LT liabilities

9,319

10,995

10,721

9,787

12,235

13,076

13,926

$14,139

$15,754

$15,836

$15,602

$18,127

$19,111

$20,092

$9

$9

$9

$9

$9

$9

$9

$3,468

$3,767

$4,044

$4,375

$4,379

$4,644

$4,926

Other current assets

Total operating assets
Fixed Assets

PP&E
Accum. D&A

Marketable securities net

Total assets
Operating Liabilities
Accounts payable

Long-term liabilities

Total Liabilities
Equity
Common stock
Additional Paid-in Capital
Retained earnings

25,995

28,348

30,679

32,416

34,317

36,868

39,688

OCCI

(3,543)

(5,025)

(4,750)

(3,913)

(6,289)

(4,704)

(4,704)

Noncontrolling interest

354

442

465

446

33

33

33

Treasury stock

$10,266

$11,679

$12,407

$15,385

$19,307

22,322

25,253

Total Stockholders' Equity

$16,017

$15,862

$18,040

$17,948

$13,142

$14,528

$14,699

$30,156

$31,616

$33,876

$33,550

$31,269

$33,639

$34,791

Total liabilities and equity

Source: Company reports

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INVESTMENT MANAGEMENT CERTIFICATE PROGRAM

May 10, 2015

Appendix 4: Ratios
Ratios
2011
2012

2013

2014

2015e

2016e

Profitability
Gross margin
Operating (EBIT) margin
Net profit margin
Activity

47.0%
20.9%
14.5%

47.5%
21.7%
14.9%

47.8%
21.6%
15.1%

48.3%
22.4%
15.6%

48.7%
22.8%
15.8%

49.0%
23.9%
16.6%

0.95
0.96
4.78
76
7.92
123
9.50
84

0.92
0.91
4.33
84
7.54
133
9.21
93

0.93
0.92
4.18
87
7.43
136
9.05
96

0.96
0.98
4.35
84
7.50
133
9.12
93

0.97
1.02

0.95
0.99

Op asset / op liab
NOWC Percent of sales
Solvency
Debt to assets
Debt to equity
Other liab to assets

2.26
20.8%

2.34
21.5%

2.06
21.1%

1.89
17.9%

2.01
17.2%

2.00
18.0%

16.3%
32.6%
18.4%

17.7%
33.3%
13.9%

17.9%
33.5%
11.3%

21.9%
52.0%
17.3%

22.8%
52.8%
16.0%

24.5%
58.0%
15.5%

Total debt to assets

Total liabilities to assets
Debt to EBIT
EBIT/interest
ROIC

34.8%
49.8%
0.84
42.03

31.6%
46.7%
0.93
49.11

29.2%
46.5%
0.90
64.10

39.1%
58.0%
0.96
65.46

38.9%
56.8%
1.02
68.93

40.0%
57.7%
1.05
66.80

NOPAT to sales
Sales to IC
Total
Total using EOY IC
DuPondt ROE Analysis

15.1%
1.24
18.6%
18.3%

15.4%
1.19
18.4%
17.9%

15.5%
1.21
18.7%
18.9%

16.0%
1.29
20.6%
21.3%

16.2%
1.32
21.4%
20.5%

17.0%
1.28
21.7%
21.3%

5-stage
EBIT / sales
Sales / avg assets
EBT/EBIT

20.9%
0.96
97.6%

21.7%
0.91
98.0%

21.6%
0.92
98.4%

22.4%
0.98
98.5%

22.8%
1.02
98.5%

23.9%
0.99
98.5%

Net income (cont) /EBT

ROA
Avg assets / avg equity
ROE

72.2%
14.1%
1.94
27.3%

71.0%
13.8%
1.93
26.6%

71.9%
14.0%
1.87
26.2%

71.1%
15.4%
2.08
32.2%

71.1%
16.2%
2.35
38.0%

71.1%
16.6%
2.34
38.9%

3-stage
Net income (cont) / sales
Sales / avg assets
ROA
Avg assets / avg equity
ROE

14.7%
0.96
14.1%
1.94
27.3%

15.1%
0.91
13.8%
1.93
26.6%

15.3%
0.92
14.0%
1.87
26.2%

15.7%
0.98
15.4%
2.08
32.2%

16.0%
1.02
16.2%
2.35
38.0%

16.7%
0.99
16.6%
2.34
38.9%

ROE using EOY equity

Other

27.0%

24.6%

26.0%

37.7%

35.9%

38.4%

Payout Ratio
Retention Ratio
Sustainable Growth Rate

36.3%
63.7%
17.4%

36.8%
63.2%
16.8%

37.1%
62.9%
16.5%

44.7%
55.3%
17.8%

51.0%
49.0%
18.6%

50.0%
50.0%
19.5%

FA (gross) turnover
Total asset turnover
Inventory Turnover
Inventory processing period
Accounts Receivables Turnover
Operating Cycle
Accounts Payables Turnover
Cash Conversion Cycle
Liquidity

Source: Company reports

22