Three good reasons to consider 3M

Posted Apr 20th 2009 1:30PM by Joseph Lazzaro
Filed under: Stocks to Buy

Most investors know that this market is not for the squeamish. The United States remains in a pronounced recession and although there are some 'green shoots,' the reality is commercial conditions could remain sluggish for another year, or perhaps longer.

Still, no one ever made a dime by not taking prudent risks, and with this in mind, 3M (NYSE: MMM) is worth a review.

First, in general, analysts expect 3M's revenue to decline 8-12% in 2009, but improvement in the second half creates a silver lining, and an opportunity for investors who can tolerate moderate risk.

Second, 3M's industrial and transportation unit -- which includes everything from adhesives to paper/packaging to appliances and electronics, is expected to register decelerating growth, due to the U.S. and global recessions. However, the company's health care unit should fare better, given advantageous demographics and the less-cyclical nature of health care services. The First Call F2009/F2010 EPS estimates for MMM are $4.01 / $4.28.

Third, 3M's strong free cash flow and net returns on capital, combined with a reasonable p/e of 11, don't necessarily blot out the somber macroeconomic outlook in the U.S. and internationally (what does?), but a reasonable case can be made to establish/add to a 3M position at these levels, before everyone else does.

Stock Analysis: 3M is a moderate-risk stock. Consider buying a 25% position in MMM now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your MMM position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $32.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: 3M, MMM