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3M (MMM) is a high quality company selling below it's fair value. This company produces many products - well beyond its scotch tape brands that it is so well known for. 29% of 2006 revenues came from its industrial and transportation division, 17% came from its health care division, 16.4% came from its display and graphics division, 14% came from its consumer and office division, 11.4% came from the safety security and protection division and lastly, 11% came from its Electro and Communications division. Buying this company is like buying 6 companies in one. There is not one product that is sexy or exciting but this does not matter because somehow this company can command a huge 50% overall margin with all the products it sells. The company has been getting into higher growth areas such as optical films for LCD TVs and has made some biotech acquisitions recently. 63% of its sales are from overseas so it is a good way to play the growth of international markets. The combination of high margins, high ROIC, and low tax rates makes this company a good buy. The company will report earnings and have a conference call on Thursday April 26th. Already, management has set Wall Street expectations low and commented that the first quarter will be one of 3M's most challenging for the year. Given that expectations are already low for the company and other industrials such as United Technologies and Honeywell have reported better than expected earnings, 3M may get a pop in its stock price with any better than expected earnings report. The Q4 2006 earnings report resulted in a 5.4% decline in 3M's stock price. Hopefully Q1 2007's earnings report will be better than Wall Street expects. We have already placed our bets that there is better than even odds for this to happen. Even if it doesn't, the company is already undervalued even with conservative valuation assumptions. Company: 3M Trading Symbol: MMM Date of Recommendation 4/20/2007 Risk Low - Moderate Stock Price as of Recommended Date 77.75 Fair Value 85 Discount of Price vs Fair Value: 8% If you win on this stock Reward yourself and us by clicking the link below and buying a big ticket item at Amazon Bears Say We Say The margins are shrinking. In fact, margins have dropped significantly to 45% in the latest quarter. If this negative trend in margins continue, then this stock may be overvalued The declining margins are a concern from a valuation standpoint. We valued this company assuming that margins remain at 45% and the company is still undervalued. If the the margin pressure stabilizes or even increases the stock will remain undervalued. The company has exposure to the auto and housing industries. As these industries turn down that will have a negative impact on earnings. Most large conglomerate industrial companies have exposure to these industries and they reported fantastic earnings. The CEO of United Technologies recently commented that United Technologies should continue to do well even with the uncertainty of the housing and auto industries. Since 3M is a large industrial company much like United Technologies and United Technologies reported great Q1 earnings, it is more likely that 3M will also report good Q1 earnings. Assumptions Expected Revenue Growth Over Next 12-96 Months 6% Expected Revenue Growth Over Next 96+ Months 4% Expected Future Margins 45% Future Beta .87 Assumed Capital needed to grow sales by $1 $1 10 Year Bond Yield and Weighted Cost of Capital 4.7% and 8% ROIC in excess of WACC for 120+ months 1% Depreciation and Depletion Life 15 years