3M GROUP

Company valuation: APPLIED

Presented By: Diego Barrera, Andres Jaramillo and

Obar Redondo, Mario Garcia
3M is the acronym for Minnesota Manufacturing Mining Company. It is an American

multinational company founded in 1902. This means that until 2020 it has been in existence

for 118 years. It was founded in the town of Two Harbors in Minnesota when five partners

decided to mine an aluminum oxide ore called corundum. This product was highly efficient

as an abrasive and for the time of the foundation of the company. This product became part of

the industrial production inputs of the time. But they had a problem and that was that the

product was of very low quality so they had to change their business model for one in which

they produced sandpaper. This was the first profitable product the company had and they also

invented the first sandpaper. During the first years of its foundation and with a lot of

innovation the company dedicated itself to the production of abrasives. Then, with the same

innovation that has always characterized them, in 1930, 3M diversifies and begins to

commercialize adhesive tapes, which represented a great boost in the brand image. The

company currently divides its production into three business lines: Safety and Industrial,

Transportation and Electronics, Health Care, and Consumer. The Safety and Industrial

segment consists of personal safety, industrial adhesives and tapes, abrasives, closure and

masking systems, electrical markets, automotive aftermarket, and roofing granules. The

Transportation and Electronics segment consists of electronics, automotive and aerospace,

commercial solutions, advanced materials, and transportation safety. The Healthcare segment
includes medical and surgical supplies, skin health and infection prevention products, oral

care solutions, separation and purification sciences, health information systems, inhalation

and transdermal drug delivery systems, and food safety products. The Electronics & Energy
segment involves in the optical films solutions for electronic displays, packaging and

interconnection devices; insulating and splicing solutions; touch screens and touch monitors;

renewable energy component solutions; and infrastructure protection products. The

Consumer segment products includes office supply products, stationery products, home

improvement products, home care products, protective material products, certain consumer

retail personal safety products, and consumer health care products.

● ​Stock Performance: Analyzing the behavior of the share during the last 5 years, it can

be seen that its price has fluctuated between 146 and 258 dollars per share. Being

124.89 the lowest historical minimum that have touched and 258.63 the maximum

historical. In the first period of the 5 under study, the opening price was 158.99. For

the last two periods the share price has been in constant decline. Only during the

periods 2016 and 2017 did the share price increase. But as soon as 2018 began the

prices were falling until today, April 2020 touching historical lows in the last 5 years.

In the short term, i.e. between 2 and 6 weeks, stocks are expected to rise. Then in the

medium term, i.e. between 6 and 9 weeks, they will continue to rise. But in the long

term, that is to say, more than 9 weeks, the forecast is that the price of stocks will
 decline and follow the normal rhythm of decline that they currently have.

● ​The market capitalization is 84.25 billion dollars. The outstanding shares represent a

total of 575.26 million dollars and the public float 575.45 million dollars. The % of

float shorted corresponds to 1.42%.

● ​3M has 5 lines of business each with different subsidiaries. The five lines are:

Chemicals, cleaning supplies, office supplies, traffic signs and pharmacology.

NexCare is the largest selling subsidiary of the company and is responsible for the
sale of personal hygiene and infection prevention products. Littmann Stethoscopes is

the company's next brand. It sells essential supplies for clinical observation such as

stethoscopes. Scotch Brite markets products for industrial cleaning, mainly abrasives

used in e.g. industrial kitchens and manufacturing companies. In general, it

manufactures products for industrial cleaning. Thinsulate is the brand that

manufactures synthetic fibres used as thermal insulation.

● ​Because it is a multi-brand company, 3M's customers can be very variable. But on a

general level we can say that they are the supermarkets of large stores like WalMart, a

very important customer is the industrial sector to whom they sell their abrasives, the

hardware stores, DIY stores, hospitals, offices. In general, it is a company that

manages a BTB business model. INDUSTRIES Automotive Consumption Healthcare

Design and Construction Electronics Energy Manufacturing Mining, Oil and Gas

Security Commercial Solutions Transport

● ​Its main suppliers are chemical input and raw material companies. Because, for the

most part, 3M is a manufacturing company. The 3m business model has been based

on preserving and instilling in its workers a culture of innovation. This is reflected in

its large product portfolio. Its business model is mostly a Business To Business one

because its products are designed to be distributed to third parties and not directly to

the final consumer. And when it comes to products such as abrasives, they come to

companies and not to consumers. (by consumers we mean ordinary people)

● ​The company's main growth plan is: Sustainable innovation, as well as growth as a

business and brand building, and it was possible thanks to the company's people with

unique behaviors such as: Innovating, Acting with integrity and transparency,

Developing others and oneself, innovating, Acting to win, prioritizing and executing,
and Encouraging collaboration and teamwork. 3M's collaborative culture encourages

proximity to customers and markets to create new inventions by pursuing unique

combinations of technologies and ideas. People are the beginning of this chain

reaction. It is the most important part of any innovation culture, and as such, they

must be a priority, as they are for 3M.

● ​3M Company has a risk value of 7.00. The risk value of 3M Company is significantly

higher than that of its partner group. Therefore, 3M Company is significantly less

risky than its Allied group.

● ​There is currently a pandemic situation in the world that is somewhat unprecedented

in the history of contemporary humanity. 3M is the company that leads the production

of one of the most essential protection elements to prevent infection: mouthpieces. It

is the only company certified by the World Health Organization to produce the

ultimate mouthpiece to prevent the spread of infection. So it's a great opportunity for

3M to exploit this new window of business that has been opened for them.
 Company Valuation.

Second Deliverable.

Presented By: Diego Barrera, Mario Garcia, Andres Jaramillo, Obar Redondo.

April/2020.
 ● 3M stock performance financial analysis
● Consulting at internet, we obtained the following inputs for 3M:

Inputs       
Beta unleavered    0,71  
Risk Free    3,00% 
ERP    6,0% 
Country Risk Premium    0,0% 
Kd    5% 
WACC for Termianl 
Value    7,5% 
Targed D/E    50,0%  
Tax Rate    26,0% 

● The unlevered Beta was obtained from the finbox.com website. The sources used in the
template helped to find the other inputs for the company's projections. The following data
from the cash flow statement and the 5-year income statement were used to build the
projections:

● Income statement:
● Cash flow statement:

● Based on the net income, the following graph was drawn up:
The percentage difference between each was then calculated in order to estimate revenue
growth:

2015 2016 2017 2018 2019

32.136 32.765 31.657 30.109 30.274
Variation (%) 1,957% -3,382% -4,890% 0,548%

● It is expected then, that after 2019 due to the behavior of the graph, revenues will
increase. In addition, it can be seen that its stock market has increased despite the
COVID-19 crisis. Due to the behavior of the time series, it is expected that net revenues
will increase, so based on these percentages and the company's growth vision, a 2%
growth over revenues will be assumed in the following years. The EBIT is obtained from
the Income Statement and the PP&E and WK are obtained from the Cash Flow Statement.

Cash Flow build-up  2019  2020  2021  2022  2023  2024  2025 
 
Net Revenue  32.136   32.779   33.434   34.103   34.785   35.481   36.190  
Growth    2,0%   2,0%   2,0%   2,0%   2,0%   2,0%  
 
EBIT    6.160   6.283   6.409   6.537   6.668   6.801  
EBIT Margin    18,8%   18,8%   18,8%   18,8%   18,8%   18,8%  
 
10.43 10.64
Net PPE  9.333   9.834   10.030   10.231   6   4   10.857  
% of Sales  29,0%   30,0%   30,0%   30,0%   30,0%   30,0%   30,0%  
 
Net WK  4.361   4.448   4.537   4.628   4.720   4.815   4.911  
% of Sales  13,6%   13,6%   13,6%   13,6%   13,6%   13,6%   13,6%  
 
EBIT(1-Tx)    4.558   4.650   4.743   4.837   4.934   5.033  
Δ net PP&E    (501)  (197)  (201)  (205)  (209)  (213) 
Δ in Working 
Capital    (87)  (89)  (91)  (93)  (94)  (96) 
Free Cash Flow     3.971   4.364   4.451   4.540   4.631   4.724  
Valuation     2020  2021  2022  2023  2024  2025 
 
Free Cash Flow   
Terminal Value FCF    86.435,8    
Cash to discount    3.970,6   4.363,9   4.451,2   4.540,2   91.066,9    
Growth    9,9%   2,0%   2,0%   2,0%   2,0%  
Wacc discount factor  1,00x   1,07x   1,15x   1,24x   1,33x   1,43x    
Discounted cash flow     3.695   3.779   3.587   3.404   63.537     
 
Enterprise value  78.001    

Enterprise Value  78.001,2   79.853,3   81.450,4   83.079,4   84.741,0   86.435,8    

Debt balance  26.000,4   26.617,8   27.150,1   27.693,1   28.247,0   28.811,9   28.811,9  

CFE   
Terminal Value CFE    57.624    
Cash to discount    3.615   3.902   3.980   4.059   61.764    
CF Growth    7,9%   2,0%   2,0%   2,0%   (11,7%) 
Ke discount factor  1,00x   1,09x   1,20x   1,31x   1,43x   1,56x   1,71x  
Discounted cash flow     3.305,5   3.263,0   3.043,8   2.839,3   39.508,9   –  
 
Equity Value  51.960,6    
Fwd P/E  14,494x    

Multiples comparison

The sector in which 3M is located is the industrial one, it will be compared with the following
companies:

● Honeywell
● General Electric
● Illinois Tool Works Incorporated
 ● Siemens AG

With these companies a table will be assembled with the EV/EBITDA; PE and PBV.

Average Past 5 Years  EV/EBITDA  P/E  P/BV 

3M 14,37 16,41 9,832
Honeywell 12,19 16,61 5,463
General Electric 7,95 9,34 2,602
Illinois Tool Works Incorporated 15,08 20,47 11,3
Siemens AG 7,25 14,85 2,065
Average 10,6175 15,3175 5,3575
Value (MM US$) $ 82.466 $ 70.001 $ 52.224

● With the data obtained for each company, the valuation by multiples is carried out.
The indicators are averaged without taking into account 3M's and the value of the
company is calculated based on these indicators. In the case of EV/EBITDA, it is
simply a matter of multiplying the EBITDA data for 3M by the average of these
indicators. In that case, according to the Enterprise Value differs by 5.7%, which
means that it is not far from the calculated value so the projections seem to be
correct. The same situation occurs with the P/E: it differs by 10.2% because it uses
gains obtained only until Dec 2019 and this indicator is dragged by high and low
values due to the calculation of the traditional average. Finally, the P/BV is
compared with the Value of Equity; it was multiplied by the number of shares and
the Price to book value per share, to find this value, its difference is not significant
so it can be affirmed that both have a close value.

● In conclusion, the projections made and the stipulated growth margin are consistent
with the calculations made.

THE FINAL DECISION

● The financial ratios are a tool which allows us to understand the current situation of
the company for the development of this work, we used the ratios that were issued
by the teacher to obtain the conclusion and based on this we decided to make the
decision to buy since the results we obtained were comparably superior to those of
our competition. In other words, the financial situation of our company is
considerably better than that of the other companies we used for comparison.
Therefore, Our Company has a better financial performance which allows us to say
that we dare to buy.
3M is a corporate venture that takes value from its product portfolio that spans different industry
sectors, including mining. 3M has been able to take advantage of its profits in the mining market
to partially separate itself from it, by venturing into other products. This is evidenced by the fact
that, over time, its shares have not declined and that it is a market worth buying shares in.

(Put before analysis)

What comes next

For the estimation of the discount rate at which the cash flow will be discounted, the weighted
average cost of capital will be taken into account as a fundamental axis. The assumptions under
which it is built with a traditional 50% D/E in U.S. companies based on their debt capacity. The "kd"
are obtained from financial pages such as
https://www.stock-analysis-on.net/NYSE/Company/3M-Co. The rest is calculated with the
financial staff. For a better estimation of the discount rate based on the WACC, the country risk
premium was taken into account.

The updated data discounted to this new WACC are as follows:

Cost of Capital Build-up     1 

 

Asset Beta    0,7  

Levered Asset Beta    1,1  
 
Rf    3,0% 
ERP    6,0% 
Country Risk Premium    3,5% 
Ke     12,8%  
 
Kd    5,0% 
Kd (1-Tx)     3,7% 
 
WACC     9,8% 

The discount rate for the projections until 2025 ceteris paribus is 9.8%, taking into account that to
determine the value of the shares to be invested, the risk associated with Colombia must be taken
into account. The calculations of the EV and the discounted cash flow are presented below:

Valuation     2020  2021  2022  2023  2024  2025 

 
Free Cash Flow   
Terminal Value FCF    86.435,8    
Cash to discount    3.970,6   4.363,9   4.451,2   4.540,2   91.066,9    
Growth    9,9%   2,0%   2,0%   2,0%   2,0%  
Wacc discount 
factor  1,00x   1,10x   1,21x   1,32x   1,45x   1,59x    
Discounted cash 
flow     3.617   3.621   3.364   3.125   57.101     
 
Enterprise value  70.828    

73.788,
Enterprise Value  70.828,1   0   76.644,2   79.692,6   82.950,2   86.435,8    
24.596, 28.811,
Debt balance  23.609,4   0   25.548,1   26.564,2   27.650,1   28.811,9   9  
 

CFE   
Terminal Value CFE    57.624    
Cash to discount    4.065   4.388   4.503   4.623   62.372    
CF Growth    7,9%   2,6%   2,7%   2,7%   (23,0%) 
Ke discount factor  1,00x   1,13x   1,27x   1,44x   1,62x   1,83x   2,06x  
Discounted cash 
flow     3.603,2   3.447,2   3.135,3   2.852,9   34.112,9   –  
 
Equity Value  47.151,5    

The EV/EBITDA for the valuation made with this discount rate is 11.5. This is 3 points less than that
presented by the financial information pages which work with average values. Comparable
multiples with the risk-adjusted discount rate for investing from Colombia are as follows:

Average Past 5 Years  EV/EBITDA  P/E  P/BV 

3M 11,5 12,86 9,832
Honeywell 12,19 16,61 5,463
General Electric 7,95 9,34 2,602
Illinois Tool Works Incorporated 15,08 20,47 11,3
Siemens AG 7,25 14,85 2,065
Average 10,6175 15,3175 5,3575
Value (MM US$) $ 65.935 $ 70.001 $ 52.224

With these adjustments, it can be seen that the company's values are not so far removed from
those calculated, so it can be concluded that the projections made with the WACC discount rate
are appropriate. For this particular business, it is a priority to invest once the pandemic is in its
final phase, since once the mining and industrial markets are reactivated, there will be a higher
valuation than estimated in this work. The minimum investment value is calculated with the Equity
Value discounted to wacc divided by the total shares. Note that all calculations are in billions of
dollars.

It is estimated that 3M has between 50 and 60 million shares to date. The value was taken from
https://es-us.finanzas.yahoo.com/quote/MMM/insider-transactions?p=MMM which estimates a
total of 50.12 million. With that estimated data and the calculated value, it is estimated that the
minimum to be cancelled for that share is a price of 940.77 dollars, which is a profitable business
due to the fact that today's share price is approximately 148 dollars. This means that until 2025,
with the estimates made, you will earn almost 6 times the amount of the value invested per share.