Unscrambling Monday's Egg

M - Does this Minnesota Company Pass The Dozen? (NYSE: MMM)

Putting 3M through the Chicks' Dozen
by Chick Jana

1. Buy What You Know
What do I know about 3M? Let's see, I'm a native Minnesota Chick and 3M is the company I'd see driving down Highway 94 in St. Paul. Also when I lived in Minnesota, I had a neighbor, Joe Campion, who worked for 3M (and still does). The Campions would always move into bigger and better houses. He must have sold a lot of Post-It Notes. Post-It notes I know, as well as Scotch Tape. both of them are made by 3M. But beyond this, I don't know much else. That's why I like doing these Unscramble The Chicks Dozen articles, there's so much to learn! Let's continue down Hwy. 94 and see what we uncover.

2. Keep it Simple Sister
Whoa Bessy! I didn't realize they did so much. They have so many products! For example: they make cellophane tape for music and video recording studios, they produce a ton of different kinds of sand paper, they have products that keep automotive parts in place and they are the ones responsible for keeping my baby's diapers fastened. 3M's products have provided backup security for computers; given dentists new filling materials; helped keep buildings clean; helped prevent theft of library books; and made insulated clothing less bulky and more comfortable. Did you know that 3M makes the cool new lime green signs that say School Bus or Child Crossing? How about Scotch Brite cleaning pads and Scotch guard carpet and furniture protector?

I would love to list all the products associated with each of those here but there's too many. Check out their site and you'll see all the products they offer in each of these areas.

3. Industry
The industry is a Conglomerate. What the heck is a conglomerate? My handy, dandy, notebook Webster's dictionary tells me it's a business enterprise consisting of many widely diversified companies. 3M's website boasts solutions in architecture and construction, Automotive, Marine and Aerospace, Electronics Manufacturing, Graphic Arts, Health Care, Home and Leisure, Manufacturing and Industrial, Office, Safety: Transportation and Personal and Utilities and Communications.

4. Leader in the Field
Smartmoney.com lists 3M's competitors as General Electric (the Chicks know and own), Rockwell International, (heard of them) Tyco International, Ltd. (not the toy company) and United Technologies Corporation. As a stock performer, this company is not a leader in its field. The four other competitors have out-performed the S&P in the past 5 years. The best performer, Tyco International, LTD, grew 600% in the past 5 years. Chick Lorene owns Tyco International, LTD. I'm sure she's very happy with her investment. 3M on the other hand, has not beaten the S&P over the past 5 years.

5. Repeat Profitability
From their wide range of products it looks as if there is a lot of opportunity for repeat profitability. See Chicks Dozen #2 to see what keeps 3M customers coming back again and again.  

NOTE: Figures for the following equations were found at  Marketguide.com using the financials for the quarter ending 12/31/00. All figures are in millions.

6. Gross Margins
At 60%, I would say they're pretty darn good.  

(Sales - cost of Goods Sold) / Sales

(4196 - 1663) / 4196 = .603

.603 x100 = 60%

7. Net Margins
These are almost where we like them at 7.7%.

Net Income / Sales

325 / 3196 = .0773

.0773 x 100 = 7.7%

8. Cash vs. Long Term Debt

Cash* / Long Term Debt

302 / 971 = .311

*cash equiv. and marketable securities

Not good, we want the company to have more cash than debt. This number would have to be greater than 1.0, and .311 doesn't quite cut it.

9. Flow Ratio We prefer our companies to keep it below 1.5 and 3M's is 2.15. Get them some carpet cleaner as they need to tidy this up!

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt) = Flow Ratio

(6261 - 302) / (4637 - 1866) =

5959 / 2771= 1.34 = 2.15

*cash equiv. and marketable securities

10. Increasing Growth

(Most recent quarter sales - Last quarter sales) / Last quarter sales = X

X x 100 = %

Sales from Quarter dated 12/31/00 = 4196

Sales from Quarter dated  9/30/00 = 4252

(4196 - 4252) / 4252 = -.013

-.013 x 100 = -1.13 %

Dang, I like to see sales growth from quarter to quarter, not shrinkage. But if you look at their annual sales from Marketguide, sales have increased year over year for the past five years.

11. Strong Management and History
Stay tuned for tomorrow's article on GE where Chick Karin gives us a brief run-down on 3M's new CEO James McNerny. He was one of the three final candidates to replace Jack Welch.

The history of 3M is quite extensive. They started out in 1902 in Two Harbors, MN and eventually moved to St. Paul, MN in 1915. In the beginning they made only sand paper and adhesives. Over the past 100 years, they've accomplished a lot.

Here's some great things they've done in the past 10 years as a company:

   . 85 percent reduction in volatile organic air emissions

   . 80 percent reduction in releases to water

   . 20 percent reduction in solid waste

   . 35 percent reduction in the rate of waste generation

Here's 3M's History from their site if you want a more detailed look.

Their stock over the past 10 years has been neck and neck with the S&P 500. Things from 1997 to date haven't been so stellar. The stock fell behind a bit. I'm sure it's one of McNerny's goals to get 3M's stock back on track. We'll have to see where it goes over the next year.

12. Buy on Sale

52 week high: 122.94

52 week low: 78.19

52 week average: 100.56

Current Stock Price (as of 02/02/01): 107.31

It's close to being on sale, but remember Chickies, this criterion only comes into play when all the other Dozen points are met and we can't decide between two companies. If one is on sale, and the other isn't, we lean toward the blue-light special.