I Applaud J.P. Morgan Analyst For Downgrading 3M

(Last Updated On: October 9, 2017)

Summary

  • JP Morgan’s analyst downgraded 3M to “Sell’ In September 2017. Some investors voiced their displeasure on blogs and message boards.
  • In a January 2017 post I indicated I thought MMM was expensive. The price has just ratcheted up subsequent to that post.
  • I am cautiously optimistic JP Morgan’s analyst’s call will be correct and the stock price will drop.

Introduction

In mid September 2017, Stephen Tusa, a Wall Street Analyst with JP Morgan downgraded 3M (NYSE: MMM) to “Sell”. By downgrading MMM to “Sell”, it is now only the second company he covers on which he has slapped this recommendation.

Subsequent to the release of his recommendation I noticed some investors making derogatory remarks on blogs and message boards about his call. While some commented that a significant price drop would be welcomed since it would allow them to acquire additional shares, some stated the analyst was “full of baloney” and that MMM would hit much higher levels within the year.

In today’s post I want to touch upon why I welcome Tusa’s downgrade and why I sincerely hope his call turns out to be correct.

Recent Events

MMM is continually evolving organically and through divestitures/acquisitions.

In early October 2017, MMM completed the sale of its Electronic Monitoring Business for ~$200 Million. Immediately after this announcement, MMM completed its $2 Billion acquisition of Scott Safety from Johnson Controls; Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus (SCBA) systems, gas and flame detection instruments, and other safety devices that complement MMM’s personal safety portfolio.

These two events were followed by MMM’s October 5, 2017 announcement of the pricing of its tender offers to purchase for cash up to $400 Million of its 5.70% notes due 2037 and 6.375% debentures due 2028.

Jefferies Industrials Conference – August 9, 2017

MMM will be releasing its Q3 2017 financial results on October 24, 2017. Until such time as these results are released, you may wish to refer to the Q2 2017 results released July 25, 2017 (the Form 10-Q can be found here).

I also encourage you to review MMM’s SVP and CFO’s presentation at the above noted conference which addresses the 3 key levers for growth:

  • Portfolio Management
  • Investing in Innovation
  • Business Transformation

Dividends, Dividend Growth, and Stock Repurchases

I love companies where their dividend and stock repurchase policies are not detrimental to their long-term health; MMM is sharing the love.

Source:  MMM’s August 9, 2017 presentation at the Jefferies Industrials Conference

As you can see from the following image, MMM’s metrics are strong. I do not foresee a risk that MMM will need to cut its dividend. In addition, Free Cash Flow per share and the share count are also trending nicely.

(Source: Morningstar)

I strongly suspect that within the first 2 weeks of November 2017, MMM will announce another $1.175 quarterly dividend payable within the first half of December 2017. On this basis I have calculated MMM’s compound annual dividend growth rate as follows:

I’ll put up with 9+% growth!

Valuation

The current mean EPS estimate for fiscal 2017 from 10 brokers is $8.95. At the time of my January 25, 2017 post, the mean EPS estimate from 17 brokers was $8.63.

(Source: TD WebBroker)

When I composed that post I felt MMM’s price of $175.53 and its PE of 22.11 were somewhat elevated. Here we are, almost 10 months later, and the long overdue correction I still think is warranted has not materialized.

MMM is now trading at ~$216.50 and the PE is shy of 25. Had my crystal ball not been so foggy I would have acquired a few hundred more MMM shares earlier this year.

Alas, my ability to accurately predict the direction of stock prices is dismal. We have merely accumulated additional MMM shares as a result of me having had the astute foresight several years ago to set up automatic dividend reinvestment arrangements; I strongly suspected the more actively engaged I was with our investments, the greater the likelihood for me to mess up.

I Applaud J.P. Morgan Analyst For Downgrading 3M

Look, I like MMM and regret I don’t own several thousand shares versus ~1000. I want to increase my MMM holdings so I certainly don’t want the price to go up. I suspect that if you want to increase your MMM position you are thinking the same way. That is why I am puzzled by investors who indicate they like MMM and want the price to go up.

Perhaps I am missing something but why would you lambaste an analyst who slaps a “Sell” rating on MMM which could drive the stock price lower? NOTE: Regrettably, MMM’s stock price has actually risen subsequent to Stephen Tusa’s “Sell” rating.

Final Thoughts

I am still cautiously optimistic we will experience a long overdue market correction; if I keep thinking this way I am bound to be right at some stage in the future. When I am eventually proven to be an accurate forecaster of stock prices I intend to acquire additional MMM shares.

At the moment, however, I have done my fair share of acquiring shares in other companies over the past few months. If I were to acquire a reasonable number of MMM shares at this stage, I would need to sell some other holdings; I am not prepared to do so at this stage.

In 2018, my wife and I will initiate a RRSP Retirement Account Meltdown Strategy at which time this should free up some money to perhaps acquire additional MMM shares.

Until such time, I will hold out hope that Stephen Tusa’s crystal ball is far clearer than mine and MMM’s stock price will experience a nice decline in 2018.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long MMM.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.

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3 thoughts on “I Applaud J.P. Morgan Analyst For Downgrading 3M”

  1. Chuck,

    I am not advocating any style of investing as such. I am simply pointing out to what appears to me a glaring inconsistency of being long MMM and at the same time hoping it will go down in value so that you can buy more. Why applaud the JP Morgan Analyst, who has been clearly wrong? Why not just enjoy your gains? There is a colloquial expression that I won’t repeat here. If I am truly confident in a position, then I add to it. If I have doubts then I hold, sell, average down, use options to bracket my risks etc.

    Happy investing,

    andrew

  2. Hi Chuck,

    I have now read your posting on MMM, three times, one for each M? and frankly, I don’t get it.

    You say: I am puzzled by investors who indicate they like MMM and want the price to go up.

    The answer to your “puzzle” is that the only reason to invest in anything and that every investor only buys stocks is in the hope that the price will go up (unless they are short and are expecting the price to go down).

    You seem to be confused by two things: one your analysis last year that MMM was over valued and your admission that:

    I want to increase my MMM holdings so I certainly don’t want the price to go up.

    You took comfort in the fact that an analyst had a “sell” rating, which like your own analysis, turned out to be incorrect.

    Had you truly believed in your own valuation in January 2017, you could have made a number of decisions.

    You could have sold some or all your holdings of MMM and waited for an opportunity to buy the shares back at a cheaper price.

    Had you sold, you could have reinvested in another company you felt was under-valued with better prospects and made more money.

    You could have held and put in an order to buy more at a lower price.

    Lastly, you could have used options to enhance your positions, based on your belief that MMM was over valued.

    One strategy is to sell out of the money covered calls, which if the price stays the same, allows you to keep the premium and if the price goes up, then you sell at a higher price.

    You could also sell naked puts, which will expire worthless if the price of the stock goes up, or if the price goes up you keep the option premium.

    This being Canadian Thanks Giving, I would be grateful for an investment that increased in value despite some misgivings and being proved wrong by the market, and enjoy my good fortune and have an extra serving of turkey?

    andrew

    ps I know nothing about MMM, but my intuition is that it will dip in price after the earnings announcement, so you may wish to look at some options?

    1. Andrew,

      Messrs Buffett and Munger have used the “buy and hold” strategy very well with some of their holdings. I don’t think they sold KO and AXP when the stocks prices zoomed up in the late 90s and early 2000s, respectively.

      Now, perhaps they used various option strategies. That I don’t know. I know you actively use options and are FAR more proficient in this regard than me. Perhaps one day I may venture down that road and used covered calls (naked puts take me out of my comfort zone). I will definitely run any option idea I have past you before I implement it.

      In the interim, my “buy and hold” approach on my MMM holdings has worked out pretty well. My MMM holding in my retirement account (I don’t disclose these holdings on my site) has an average cost that is sub $70; the current stock price is about ~$216. I suspect that if I had used an options strategy I may have found a way to mess up a good thing.

      Have a wonderful Thanksgiving!

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