Shares of 3M have dropped 7.8% for the quarter through June 23 – with the S&P500 down only 0.4%. We thought it was time to have an objective look at 3M using the interactive Valuecruncher valuation tool.
3M grew revenues from US$16.3 billion in 2002 to US$24.5 billion in 2007 – 8.4% compound annual growth rate. Our assumptions of revenues for the next three years are US$26.5 billion in 2008 growing to US$29.5 billion in 2010 – 6.4% compound annual growth rate. We have projected EBITDA margins remaining flat at 26.5%.
We have used a terminal growth rate of 2.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 5% dropping to a 2% stable growth rate over the next ten years.
We have used a WACC (discount rate) of 9%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). We think this WACC of 9% is reasonable but recognise that the actual number could be as low as 7.5-8.0% or as high as 10%.
We used a terminal capital expenditure number of US$1.5 billion.
Our analysis incorporates the cash and debt on the 3M balance sheet – Valuecruncher calculates a net debt number.
Our analysis gives a valuation of US$85.16 which is 16.7% above the current share price of US$72.96
Based on our analysis, 3M shares look cheap. Play with our assumptions – what does your analysis say?