Tuesday, June 25, 2013

Trees, Mass Destructed, Masks and Madness - 3M

Last week was hell week in Singapore.

For the global folks who are uninformed, Indonesia burned down Sumatra's virgin forests to make way for crop plantation and resulted in drastic air pollution as the haze from the smoke invaded half of South East Asia, with Singapore and West Malaysia most adversely affected.

For those of us in Singapore, it really felt like living in hell, right? We were breathing smoke, our clothes and food smelled like ashes and we were queuing to reincarnate. Well, fortunately (or maybe unfortunately) no, we were queuing to get 3M’s N95 masks that were supposed to help us breathe better in bad air.

But there weren’t enough to go around. We hear stories of how poor aunties queue for an hour at Guardian pharmacy only to find out that the inventory ran out. We then activated our friends overseas to bring masks back from all over the world. Masks were running out in Hong Kong, Taiwan and Australia. Air purifiers ran out too. Sharp’s ionizer sold so well that the stock actually bounced a bit. This Japanese firm did went to hell and came back.

So turning a threat into opportunity, I decided to revisit an old stock that I looked. I always liked to co. but somehow, never got a chance to own it. Yes, it’s 3M, the manufacturer of the all important N95 masks.

Since it has been years since I looked at 3M. I just want to share my process how I approach a stock analysis for the first time. As mentioned before, I ask 10 questions and try to answer them. Also, this would be a really prelim analysis. A deep dive analysis (like the one I did on Swatch which is still incomplete) should follow if you are really serious.

So here goes:

1. What is the Investment Thesis?

3M is a global industrial conglomerate founded on principles of science, imagination and innovation. It is a global niche leader in fields that it conducts its businesses and its products resonate quality assurance. 3M is a story about branding, innovation and shareholder return.

2. It is Cheap?

Sadly no.

3M trades at 16-18x PE (1 to 2 year forward) for an industrial company
4x Price to Book on ROE of 20+%
FCF yield 5% and Dividend of 2+%

Buy at $80, when it is 20% cheaper vs now at $108.

3. It is a Good Business, Good Franchise?

Hell, YES!

3M began operations as the Minnesota Mining and Manufacturing Company in 1902. The company started as a sandpaper manufacturer and later manufactured masking tape in 1925. Today 3M has over 55,000 products in six business segments. 3M is headquartered in St. Paul, Minnesota and has operations in more than 60 countries.

Some of its best well-known products include Post-It Notes, Scotch Tape (yes the brand became the product!), 3M Solar Film and Car Floor Mats and not forgetting N95 masks! It also has a huge array of products used in almost all aspects of our lives, just that we are not aware. This includes film used in our mobile phones, safety goggles, tapes, etc. You name it.

30% of 3M sales comes from new products which allow it to reset price points and capture customers’ time and mindshare.

3M also focuses only at the top of the pyramid high performance products to differentiate itself from the competition. Top tier products account for 50% of its sales.

15% Time: In 1948, 3M’s management introduced this concept that allows its staff to spend 15% of their time to do non-core related idea generation. Post-it notes and some products we see today were born from 15% Time. Today many innovating firms use the same concept to help foster innovation. For example: Google’s 60:30:10 concept.

4. How’s the Management?

3M’s management is very focused on shareholder return. It has been paying dividends and it regularly conducts share buybacks.

5. Does it have Strong Financials?

Here's a cheatsheet that I would often use as a first cut to look at the co. In short everything is in order.

6. Geographical and Industry Exposure?

30+% Sales to EM markets.

Quick Regional Operating Profit (OP) breakdown
Asia Pacific 41%
Europe, Middle East, Africa 19%
Latam, Canada 14%
US 26%

Segment OP breakdown and OP margin (2012 USD) Industrial 2.2bn 23%
Safety and Graphics 1.2bn 22%
Electronics and Energy 1.0bn 19%
Healthcare 1.6bn 32%
Consumer 0.9bn 22%
Others -0.6bn
Total 6.5bn 22%

7. Dividends?

3M is a Dividend Aristocrat ie it has been giving and increasing dividend for the past 40 years. This company has been giving dividend since Singapore was born. It’s current dividend yield is 2.4%.

8. Risks and Mitigators?

3M is very geared to the global economy. Weakness and slowdown has an amplified impact on 3M. During the Lehman GFC (Global Financial Crisis), 3M fell to a 10 year low of $40.

9. 2nd Level Thinking Angle?

In this kind of weak stock market and macro environment 3M is not on investors’ mind. But the stock has not corrected as much. This could be a reflection that the 3M brand is also growing stronger.

10. Can I Sleep Well at night holding this?

With the N95 mask on, maybe not. But no haze, Three Yes's!

Well that's that for 3M. Hope to do a really deep dive analysis in time. But this is a great stock and I do hope to have a chance to own it soon!

1 comment:

  1. When it comes to companies with solid business models and strong operating cashflows (like 3M), I tend to apply Buffett's quote here: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." When I paid $80 for it I didn't think it was cheap. But when you factor in the recurrent sustainable earnings, and growth through innovation, there is a case to be made for margin of safety. Further substantiated by its standing in the Dividend Aristocrats.

    Disclosure: I am vested in 3M.