By Ryan Barnes. Edited by Douglas A. McIntyre
3M Corporation (MMM – $74.70; Breakup Value $109)
3M is a company that has prided itself on ingenuity and innovation to drive earnings growth, and that spirit has generally served shareholders well over the years. The downside of that strategy, however, is that the company has to make a few whiffs before they connect for a home run. As such, the company has 50,000 products, but many barely add a penny to net earnings. Management has already stated that they are committed to selling off slow-growth businesses in an effort to streamline their focus. For shareholders, this should ideally translate into a higher earnings multiple, which is currently held down by the lackluster performance of a few of their operating segments.
The company has 6 designated segments, ranging from industrial products to healthcare. The segment investors know best is the Consumer & Office Products group which produces such items as the Post-It and Scotch Tape. While this division may be the public face of the company, its slow revenue growth is holding back the company from what it could be. The same can be said for the Electro & Communications group; both have shown low single-digit revenue growth for several years.
If 3M were to sell of the latter and spin off the Consumer group as its own stock, two important things would happen. First, the 3M that would be left over would still have nearly 75% of its revenues intact and could earn a P/E reflective of their high technology initiatives such as LCD displays, RFID, and nanotechnology. Secondly, they could retain a partial ownership in the new “Post-It stock” and work innovative products to it as they think them up, retaining their image as a consumer-friendly think-tank.
The sale and spin-off, if valued at market multiples, would fetch a combined $15 billion. The remaining 3M should then be able to move from a current 9.6x operating income to a more technology-oriented 14x operating income over time, placing the value of the stock at $109 per share.
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.