Ticker: MMM Sector: Industrial Materials Industry: Conglomerates

Recommendation: Pricing Closing Price 52-wk High 52-wk Low

Hold

$79.18 (2-12-10) $85.19 (1-19-10) $40.87 (3-06-09) Company Background

Market Data Market Cap Total assets Trading vol.

$56.27. B $27.63 B 3.7M (3mo avg)

Valuation EPS (ttm) P/E (ttm) Div Yield

$4.52 17.53 2.6

Profitability & Effectiveness (ttm) ROA 10.12% ROE 22.75% Profit Margin 12.41% Oper Margin 18.8% Gross Margin 46.6%

3M is a diversified global technology and manufacturing company offering a broad range of products. It was founded in 1902 along the north shore of Lake Superior in Minnesota by Henry Bryan, Herman Cable, John Dwan, William McGonagle and Dr. J. Danley Budd. The original plan for the company was to mine the mineral corundum which would then be sold to manufacturers of grinding wheels. The company first began its product portfolio with sandpaper and has grown it to over 55,000 products today. Some of the most recognizable brands include Filtrete, Nexcare, Scotch, Post-It and Scotch-Brite. It is currently headquartered in Maplewood Minnesota, a suburb of St. Paul, and has over 76,000 employees worldwide. 3M Corporation was originally known as Minnesota Mining and Manufacturing Company and is an America Multinational Conglomerate Corporation. It is one of 30 companies listed in the Dow Jones Industrial Average and is also a component of the Standard and Poors 500 index. 3M is a very diversified globally and continues to look for opportunities to grow its international businesses. Some of the major acquisitions over the past year have occurred in markets outside the US. International sales currently account for 64% of 3Ms total sales. 3M also pays a strong dividend compared to the industry and many other holdings within our portfolio. 3M paid a dividend of 2.04 per share in 2009 and has increases its dividend yield every year for the past 51 years.

ANALYST NAME Leslie Moore Lcmp77@mail.missouri.edu

Products

3M has over 55,000 products in the areas of displays and graphics, electronics an electrical, healthcare, home and leisure, office, manufacturing and industry, safety, security and protection, and transportation. Together these products brought revenues of over $6 billion as of September 2009.

SWOT Analysis Strengths R&D 3M is one of the most geographically dispersed and diversified corporations out there today. As was stated earlier, the company produced over 55,000 different products in almost every market there is. The company operates in over 60 countries with manufacturing businesses in over 35. This has continued to be one of the biggest strengths for 3M and has allowed them to continue to push the bar for R&D and new product development. This strong product portfolio and geographic presence has allowed 3M to remain very stable despite changing economies and demand fluctuations. 3M has and continues to spend substantial money on R&D , with $1,293 million in 2009, and $1,404 million, $1,368 million, and $1,522million in FY2008, FY2007, and FY2006 respectively. 3Ms R&D expenditures, at around 5% of sales annual allows 3M to maintain a sizeable competitive advantage in new product development. International/Geographic Presence 3M maintains a geographically diversified business presence. In 2008, The company's US operation accounted for 36.3% of total revenues. Europe, Middle east and Africa, Asia-Pacific, and Latin America and Canada accounted for 27.5%, 25.4%, and 10.8% of total revenues, respectively. The geographic diversity of the company helps protect it from some demand fluctuations, although not as helpful in a global recession as we have just experienced. Steady Revenue Growth

3M has seen steady revenue growth, with revenue up over $25 billion in 2008, from about $20 billion in 2004. Unfortunately, revenue was down to about $23 billion in 2009, but hopefully they will be back on track this year. Weaknesses Class Action Suit In May 2009, current and former employees of 3M filed a class action lawsuit in US District Court for the Northern District of California alleging age discrimination in violation of the Age Discrimination in Employment Act (ADEA). The potential class of plaintiffs includes more than 6,000 current and former 3M employees, including approximately 50 men and women who have already opted in to the lawsuit. The complaint alleges that since at least 2001 3M intentionally has discriminated against employees over age 46 in performance appraisals, training, promotions, and pay because it perceives them as unwilling or unable to accept or adequately implement 3M's new management techniques. As the final indignity, 3M fires or forces these older employees into retirement or resignation, according to the complaint. Poor performance of Display and Graphics Segment In FY2008, the display and graphics segment of the company recorded revenues of $3,255 million in FY2008, compared with $3,904 million in FY2007, a decrease of 16.6% compared with FY2007. A weak performance of this segment, which contributed about 13% of the companys revenues in FY2008, would have an unfavorable impact on the companys financial performance. Third quarter 2009 sales in this segment were pretty flat with that of 3rd quarter 2008, but about a third of what they were in 2007. Opportunities Acquisitions Acquisitions are also a major opportunity moving forward with 3M. The company made a number of very strategic acquisitions in 2008 which includes companies such as Food Diagnostics and Meguiars. 3M has also made plans to spend about $1 billion on acquisitions in the next year. Considering this, Acquisitions should continue to be a big source of growth within 3M. Expansion Into Renewable Energy Sources In February of 2009 the company formed a Renewable Energy Division that it expected to help organic growth. The segment will offer a broad array of products combining both enhancements to existing products offered by 3M as well as new product development all of which focus on energy generation and energy management. The energy generation products will focus on solar, wind, geothermal, and biodiesel energy products solutions that include adhesives, films, tapes and coatings.

Technology and Supply Expansions In 2008 and 2009, 3M has made strategic supply expansions such as a deal they struck with Amperex Technologies, (ATL) to become a strategic supplier or cathode materials and to work jointly with ATL to

develop new cathode, anode, and electrolyte materials for the fast-growing lithium-ion battery industry. Lithium-ion batteries are used in handheld consumer electronics devices and in automobiles. Under the agreement, 3M granted ATL a license to 3M intellectual property for the use of 3M NMC cathode materials in lithium-ion batteries. Also, in June, 3M made an agreement with SUSS Microtech to to expand access to 3M Wafer Support System (WSS) equipment for temporary wafer bonding of ultrathin wafers required for 3-D packaging. As part of this non-exclusive agreement, SUSS MicroTec becomes an authorized equipment supplier for the 3M WSS and will manufacture and sell XBC300 and CBC300 wafer bonders configured to use 3Ms WSS materials including 3M Liquid UV-Curable Adhesive and light-To-heat conversion coating. Under the agreement, both companies will work closely to address customer demands for high-performance process solutions that support high-volume manufacturing with a competitive cost of ownership. These and other expansions should help 3M increase its product excellence. Threats Economy The biggest threat to 3M is that of a double dip recession. 3M operates globally in the industrial materials market. Sales decreased in 2009, and both industrial and consumer spending need to pick up for 3M to recover. Environment Environmental regulations also pose a substantial threat to 3M. 3M operates many facilities that are involved in chemical processes, and increased regulation could be costly. To avoid the sting of new regulation, 3M should implement as many new changes and efficiencies as it can now. The company has to allocate resources regularly to environment compliance cost, which increases the company's operating costs. Competition As a diversified industrial company, 3M has competition from a variety of companies, many of which are also holdings in the fund. Competitors include Johnson and Johnson, H.B. Fuller, Bayer, Kimberly Clark, GE, and many others. Looking at the chart, you can see that 3M has kept up with, and in the past 6 months or so outperformed the S&P and several of its main competitors. This may be attributed to the success of its restructuring plan, acquisitions, and strategic partnerships that has been the focus of much of 3M growth recently.

Key success factor

3M INTRODUCTION: 3M is a 109-year-old company is a $21-billion technology giant with major brands like Post-It Notes and Scotch Tape on its roster as well as innovative products like multi-layer optical films that go into LCDs. There are 6 major business units with 40 independent divisions in the company, operating with hundreds of offices, plants and suppliers around the world. 3M also has a number of core technologies feeding into its different markets and crossing over business lines. It was founded in 1902 and has become synonymous with innovation. While Post it Notes is its most recognized product, the company has launched more than 50,000 innovative products over the past century. The 1990s set new sales records of over $15 billion annually, and 30% of 3Ms sales were from products created in the last 4-5 years. In 2002, 3M celebrated its first Century of Innovation, recognizing the companys remarkable success, which is rooted in its ability to create innovative world products. Key success factors and critical analysis: 3M has various key factors which have contributed to its success. Some of these factors are listed below: 32 R&D locations in 30 countries coordinated by one global research center Innovation and strong technology base Diversified product line and addressing customer need Commitment to research and development Entrepreneurially oriented corporate culture Freedom to take risk and try new ideas and 15% rule and MindMatters solution Management structure Achieving 6 sigma perfection If we study these key success factors in detail and analyze 3M in prospect of entrepreneurially oriented corporation, two things that distinguish 3M from rest of the similar corporate are its rich entrepreneurial culture and the amount of freedom given to its employees to take risk. Its rich culture enables its employees to utilize their 15% of time only think and work on new ideas i.e What if your boss said you could just.

3M versus the S&P and selected competitors during the last 12 Months Financial analysis
TTM ROE ROA Debt/Equity PE 17.5 22.75 10.12 0.42 2008 32 13.77 0.53 2007 37.74 17.81 0.35 2006 38.4 18.42 0.11 2005 31.24 15.52 0.13 2004 32.74 15.61 0.07 2003 32.68 14.6 0.22 2002 22.67 13.19 0.36 2001 27.8 9.82 0.25 2000 28.84 12.54 0.15

1 Year Ago 5 Year High 5 Year Average 5 Year Low 10.1 21 15.8 9

Above I have includes a trend of some of 3Ms financial ratios over the past few years. 3M saw its ROE grow from 2002 to 2007, and ROA grow from 2001 to 2006. Both ratios decreased in 2008 and 2009, down to around where they were in 2002, which is typical of the business cycle. To 3Ms credit, is the low level of debt that 3M has maintained. 3Ms debt /equity ratio has rarely fallen below 50%. This has positioned the company well for future acquisition and expansions that management has set out to engage in. Div. ROE ROA Yeild P/E EPS 22.75 10.12 2.6 17.53 4.52 MMM 9.95 1.41 2.6 15.4 1.01 GE 35.56 9.71 4.1 13.01 4.52 KMB 26.58 14.25 3.1 14.26 4.4 JNJ 3M versus General Electric, Johnson and Johnson, and Kimberly Clark (Current)

From at look at a few of its competitors, It looks like 3M is competing well when it comes to EPS, surely a result of recent restructuring. It is my hope that this cost-cutting measure has not stripped 3M of talent that will be necessary for growth when the economy picks up. IT looks like 3M does ok with ROE, although Kimberly Clark is the real winner here. The dividend yield could also use a little work, if 3 M hopes to compete with Johnson and Johnson and Kimberly Clark. Finally 3M is clearly the most expensive stock here with a PE ratio several points higher than all of its competitors listed. This may be a sign that the stock may be overvalued, although a P/E ratio under 20 shouldnt be a huge indicator. You can see a graph of the average P/E rato for the Industrials industry hovers around 20.

As I showed before, 3M has been outperforming several of its competitors in terms of stock price in the past 6 months. During the past 3 years however, 3M has pretty much followed JNJ and KMB., all three of which have outperformed the S&P Considering that both of these stocks are currently offering higher dividend yields at a lower price than 3M I feel that for it to compete with its competitors it will need to continue its efficiency measures, continue growth, and most of all increase its dividend. If that is not the case, I feel we might see the stock price fall, at least in the short run.

3M versus S&P and selected completers over the last three years

Valuation For the valuation of 3M I will be using the Warren Buffet Owner Earnings Model. Using this model I will look at three important factors to determine the overall intrinsic value of 3M. The model will also allow for the valuation to be compared to different values related to growth rates, market returns, and Discount rates. Discount Rate In order to calculate a discount rate we must look at the risk free rate, beta, and the equity market risk premium. Using an average beta of .8 and risk free rate of .1% (current 3 month t-bill rate) and a market return of 12% we can calculate a discount rate of k =.01+ .8*(.12-.01) = 10%, (rounded up) So, we get a pretty common discount rate of 10%. Growth Rates From Year end 2008, to year end 2009, 3M saw about a 7.8% decrease in growth. Do to the diversified nature of its product lines; 3M should see growth as consumer and business spending picks up. I used a 0% growth rate for 2010, 2% for 2011, 4% for 2012, and then 5% growth through 2014 before returning to the historical average of 8% for five years, which has been the standard that many of my peers have followed thus far, following with a growth rate of 5% for the following perpetuity. Intrinsic Value After setting it up y discount rates, my model gave me a value of $76.28 per share, a few dollars under its current price of $79.50. .

Recommendation: Hold Although I was a little conservative in my valuation of 3M, I feel that this stocks price is right on target, giving me the assumption that this stock is a hold. While the companies P/E ratio, at 17.51 is a few points lower than its five year average of 15.8, if the stock price were to drop down from $79.50 to my valuation of $76.28, the P/E ratio will be more in line with its five year average. I feel that in the short run the companys stock price my fall by just a few dollars. While 3M has seen some decreased growth in the past two years, Its low debt, and commitment to R&D should see the company return to growth in the next few years. Until then, the companys steady dividend makes it an easier hold than some stocks. While, the dividend yield is lower than some companies, such as Johnson and Johnson, and Kimberly Clark, I feel that its commitment to growth both in product development and acquisitions, fueled by its exceptionally low debt levels, offsets this. Considering this, I feel that 3M will continue its moderately strong dividend and additionally see moderate growth in the next few years.

In ending I recommend we hold this stock, as it provides a steady dividend and opportunities for future growth. IF the consensus of the group is to invest in stocks that have an exceptionally high dividend yield, the group may want to sell some of the funds holdings, and invest in more shares of Johnson and Johnson or in Kimberly Klark.

Financial statements to added when the 2009 10-K is released.

Resources 3M 3rd Quarter Report Google Finance: http://www.google.com/finance?q=NYSE:MMM (For trailing twelve month financial data) Yahoo Finance Seekingalpha.com