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Using a Value Line Report: 3M Company – April 27, 2012
3M Company (MMM – Free Value Line Research Report on 3M) produce over 55,000 unique products across its six main business segments, employs over 80,000 people, and has operations in 65 countries. It makes products that people around the world use every day and know it, such as Post-it Notes, to those that most people have never heard of, Stamark pavement marking tape. Its products are so diverse that capturing the true breadth and depth in words is virtually impossible.
A large portion of the Dow component’s success is driven by its intense focus on research and development. In 2011, Research and development spending totaled $1.6 billion, 5.3% of revenues. The conglomerate has historically plowed back 5%-6% of sales into R&D and related expenses year in and year out (these figures are shown in the Business Description section of the report). This figure is quite high for a diversified manufacturer and is one of the main reasons 3M has been so successful.
Its pretty clear that this industrial conglomerate is large and well run, but that doesn’t make its stock a good investment. In fact, 3M’s current Timeliness rank is 4 (Below Average), a fact clearly on display in the Ranks box. This suggests that the next six to 12 months will see the shares underperform the broader market averages. But what about a conservative investor interested in the long term?
Where Timeliness is about expected performance over the next six to 12 months, Safety is about risk. Potential performance is usually what gets investors interested in a stock, often to the effect of overshadowing the sleepless nights that can come from excessive risk taking. There is a balance between these two aspects of investing and looking longer-term can actually ease that balancing act.
On this front, Value Line analyst Erik Antonson is projecting annualized total returns of between 14% and 19% over the next three to five years (found in the Projections box). This includes a fairly handsome dividend yield, on an absolute and relative basis, of 2.8% (found in the Top Label section that runs across the top of the report). Although the next six to 12 months are expected to be middling at best, the longer-term projections are impressive for a company that sports a top-notch Safety Rank (1, Highest).
A rank for Safety is assigned by Value Line to each of the approximately 1,700 stocks under review in The Value Line Investment Survey. This rank measures the total risk of a stock relative to the approximately 1,700 other stocks. It is derived from a stock’s Price Stability Index and the Financial Strength rating of a company, both are shown in the lower right hand corner of each report in the Ratings box.
The Financial Strength rating is a relative measure of the financial strength of the companies reviewed by Value Line. The relative ratings range from A++ (Highest) to C (Lowest), in nine steps. They are assigned by Value Line’s team of analysts and editors based on such factors as debt load, company size, and earnings history, among others. These ratings are reviewed quarterly and changes are not made lightly. The A++ that 3M has earned is clearly the top of the heap.
Stock Price Stability is a relative ranking of the standard deviation of weekly percent changes in the price of a stock over the past five years. The ranks go from 100 for the most stable to 5 for the least stable. In plain English, companies with more stable share prices get a better score here. This measure is purely statistical and based on known figures. This diversified giant is just one notch below the best possible score, at 95.
Safety ranks are given on a scale from 1 (Highest) to 5 (Lowest), a similar scale as used with the Timeliness Rank. Rank 1 (Highest) Safety, as a group, contains the safest, most stable, and least risky investments relative to the Value Line universe. Rank 3 (Average) Safety, as a group, is composed of stocks that are of average risk and safety. Rank 5 Safety (Lowest), as a group, consists of the riskiest and least safe stocks.
Safety becomes particularly important in periods of stock market downswings, when many investors want and try to limit their losses. The record of Safety over the years is impressive in the periods when the market is trading lower. This is to say that stocks with high Safety ranks generally fall less than the market as a whole when stock prices drop.
Taking a few recent examples, between June 2008 and March 2009, Rank 1 Safety stocks, as a group, fell 32.5%, while Rank 3 stocks dropped 53.2%. While no one likes to lose money, the nearly 20-percentage-point difference between these two is material. Meanwhile, Rank 5, as a group, fell 67%--more than double the drop of the Safety Rank 1 group. A similar pattern existed in the market drop between October 2007 and January 2008, in the 2000-2001 tech meltdown, and the 1987 crash.
So, investors with a short-term horizon would probably be better served looking at options beyond 3M. Conservative investors with a longer-time horizon, however, should definitely consider this high-quality Dow component.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.