Could 2015 be the year of conglomerates? A new research report from the Merrill Lynch team has put a street-high price target on 3M Co. (NYSE: MMM). It is always interesting to see street-high calls because they are generally the most optimistic scenario among all analysts who follow a company.

After 3M guided for margin expansion and raised its dividend, Merrill Lynch’s Andrew Obin and Anna Kaminskaya have now put their price target at $190 for 3M with its Buy rating. The prior street-high analyst target price was $180, and 3M closed on Tuesday at $159.05. 3M’s consensus analyst price target from Thomson Reuters was $157.29 prior to the new target.

The team’s analysis indicates a direct link between 3M’s returns and its multiple relative to the market. As returns improve, the analysts expect the multiple to continue to expand.

On the recent dividend hike, the Merrill Lynch analysts think there is room for another payout ratio raise ahead. They also increased the lower end of the buyback range after 3M raised its buyback plan and increased its dividend another 20%. This brings 3M’s payout ratio more in line with its consumer goods peers.

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Another boost is expected to come from more incremental mergers and acquisitions in 2015 and 2016. That being said, the team expects merger deals to be relatively small, in the $1 billion to $3 billion range.

The Merrill Lynch analysts said:

Our core thesis on 3M remains that the Street is missing the improving returns story at the company. While management remains reluctant to commit to long-term margin improvement, 2015 guidance now explicitly indicates that margins will continue to go up as productivity is expected to outpace strategic investments. We calculate that of the 50bps margin improvement 3M guided to next year, 5 to 10 basis points is due to foreign exchange hedging, 10 to 15 basis points comes from lower input prices (particularly oil-derived products), with the remaining 25 to 35 basis points from operating leverage and better operating efficiencies.

Merrill Lynch’s $190 price objective is based on a 2016 price-to-earnings (P/E) ratio of 21, which is a premium over the 2015 multiples for the peer groups moved one year out. That being said, the valuation is broadly in line with the consumer goods peers on 2014 earnings per share.

3M’s prior price objective was $164 at Merrill Lynch, and 3M shares have traded in a range of $123.61 to $162.92 over the past 52-weeks.

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