The Bullish and Bearish Case for 3M, UTC in 2016 (Versus GE)

The year 2016 may have gotten off to a rock start, but investors are looking for their year ahead forecasts. In 2015, the Dow Jones Industrial Average (DJIA) closed out at 17,425.03 for a drop of 2.2%. While the index performance does not account for individual stock dividends, the performance in conglomerates was very mixed. The total returns (or losses) for United Technologies Corp. (NYSE: UTX) and 3M Co. (NYSE: MMM) were -14.45% and -5.91%, respectively, including their dividend adjustments.

24/7 Wall St. wanted to see what may lie ahead for the Dow and the top stocks in 2016. It is still just too soon to call the rocky start of 2016 an end to a bull market. Still, the bull market would be seven years old if the performance gets positive again. Investors have to keep in mind that there has been a firm and unbroken theme for over four years in which investors bought up every single major sell-off.

So what lies ahead for the Dow’s conglomerates in 2016? A full 2016 outlook has been given for General Electric Co. (NYSE: GE), but United Technologies (UTC) and 3M need to be considered as well. While GE’s year-end market cap was about $315 billion, UTC’s market cap was $85 billion and 3M’s was almost $93 billion. So GE is worth over 50% more than 3M and UTC combined by a market cap measurement.

Where things get interesting in these conglomerates is that the DJIA is a price-weighted index. That means that, despite GE outweighing 3M and UTC in the S&P 500, GE’s weight in the Dow is worth only about 1.2%, the second lowest weighting of all 30 Dow stocks. UTC has close to a 3.8% weighting, and 3M is now the second highest weighting at over 5.8%. That means that these two stocks are worth less than two-thirds of GE in the S&P 500 but are over seven times the weighting of GE in the Dow.

3M ended 2015 valued at over 18 times expected 2016 earnings. That isn’t cheap for a stock, and it had been valued even higher prior to 3M’s disappointing earnings forecast in December. Still, 3M was listed very positively by Merrill Lynch in a 2016 outlook.

3M also closed out 2015 at $150.64, and the year-end consensus analyst target price from Thomson Reuters of $159.36 would imply a total return expectation of 8.51%, if you include its 2.72% dividend yield. The gain is not excessive on the surface, if you consider history, with a 52-week range of $134.00 to $170.50.

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