2018 Bull/Bear 3M Forecast: Is 3M Really Overvalued After a Stellar 2017?

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Now that 2018 has arrived, investors need to keep in mind that this raging bull market in stocks is now nearing nine years old. This is also the strongest bull market that most investors have seen in their lifetime. The year 2017 brought gains of 25% in the Dow Jones Industrial Average (DJIA) and almost 19.5% on the S&P 500. Investors also should not ignore that the major stock indexes outperformed every single strategist’s expectations by a wide margin in 2017.

Now investors have to decide how they will invest their funds in 2018. 24/7 Wall St. just came out with its annualized forecasting bias for the stock market in 2018. It looks like DJIA 26,400 and at least 2,855 on the S&P 500 are now the baseline targets for this year. For the Dow to make its targets, 3M Co. (NYSE: MMM) is going to have to do its part to help. The conglomerate is one of the most important stocks in the underlying index due to the Dow’s price-weighted calculation rather than a normal market cap weighting. But is 3M now overvalued according to Wall Street?

We would point out that on the heels of tax reform, Credit Suisse is now targeting 3,000 and Oppenheimer is targeting 2,900 for the S&P 500 in 2018.

3M has its place for consideration on the heels of tax reform. Most strategists on Wall Street are again calling for upside in the broad stock market indexes for the coming year. There is just one problem when it comes to 3M, as posed above: 3M’s stock was above the fair value consensus analyst price target from Thomson Reuters. That doesn’t mean that 3M cannot surprise to the upside, but it should at least stand out, considering that strategists are calling for the markets to go higher yet again.

3M was expected to generate a total return of only about 6% in 2017. The conglomerate surprise massively, rising more than 31%, if dividends are included. The conglomerate closed out 2017 at $235.37, but the $223.08 consensus analyst target price implies a simple price change of −5.22%. With a 2.00% dividend yield that would imply a total return of −3.22% in 2018.

Is 3M really overvalued, or will analysts play catch-up on their price targets into and after earnings season? The trailing price-to-earnings (P/E) ratio is about 26, but 3M is valued at roughly 24 times expected 2018 earnings. And Wall Street is expecting an annualized dividend hike to just over $5.00 per share later in 2018.

At the end of 2017, the forward valuation for the S&P 500 Index was 18.5 times earnings (Yardeni Research) to 19.0 times expected earnings (S&P) per share.

3M has set its fourth-quarter 2017 earnings conference call for Thursday, January 25, 2018. With that call we likely will get to see updated guidance for 2018. Its initial guidance for 2018 was given around tax reform in December as being $9.60 to $10.00 in earnings per share, with increased spending in research and development, more spent on manufacturing efforts and with organic revenues up about 5% to 7% in 2018.

As mentioned above, 24/7 Wall St. just came out with its annualized forecasting bias for the stock market in 2018. It looks like 26,400 for the Dow and at least 2,855 on the S&P 500 are now the baseline targets for this year.

While 3M’s consensus price target of $223.08 was below the share price at the start of 2018, analysts have been behind the curve on 3M due to how much it had outperformed their expectations in 2017. Late in 2017, three big target hikes were seen: Merrill Lynch to $257 from $227, Citigroup to $262 from $250 and Argus to $260 from $220. Investors may have to wait until 3M’s earnings call to get an updated target hike for 2018.

We also have to keep in mind that 2018 could be a bumpier ride than 2017, and we have featured our own 10 risks that could wreck the bull market in 2018. We also have identified low volatility strategies for equity investors who are wanting upside from stocks but perhaps lower downside than the market if a big correction comes this way.

3M has a 52-week trading range of $173.55 to $244.23 and a market cap of $139 billion. Its weighting in the Dow is 6.54%, but the rank is roughly 39th of the S&P 500.

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