The Bullish and Bearish Case for 3M in 2014

Industrials

Published: January 9, 2014 8:49 am

3M Co. (NYSE: MMM) had a phenomenal 2013, but now it has a long way to look in 2014. As part of a series of ongoing Dow Jones Industrial Average reviews, 24/7 Wall St. is evaluating each DJIA component in a bullish and bearish case for the year ahead.

The S&P 500 index rose by more than 29% and the Dow Jones Industrial Average (DJIA) rose by 26.5%. Both major index readings were their highest closing bell prices ever going into year-end. 3M rose by a whopping 54%, making it the fourth best DJIA stock of 2013.

3M gained more than 5% in December, but the gain was almost 18% in the final quarter of the year. This could have robbed gains from 2014. After closing at $140.25 for the year, the consensus analyst price target was lower at $136.91 at the time. This is likely to rise, particularly in light of its aggressive dividend hike that was above what we expected.

3M is of course subject to many macroeconomic factors. Wall Street strategists are expecting the Dow and S&P 500 to rise in 2014, and the hope here has to be that a rising tide will lift 3M too. The Federal Reserve is about to get a new chairman, and interest rates are expected to continue their rise. Europe and much of Asia are exiting their recessionary trends as well, and U.S. gross domestic product is expected to tick up.

It seems almost certain that 3M will become the next mega-cap stock, as its $95 billion market cap is very close to the $100 billion mark. Still, having a price target under your share price means that analysts have to continue to be surprised and enthralled to keep raising their expectations.

A bearish issue could revolve around valuations. 3M trades at more than 20 times expected 2013 earnings estimates and more than 18 times expected 2014 earnings estimates. This is just too high, and it makes General Electric Co. (NYSE: GE) suddenly look very cheap, considering its financial services spin-off coming in 2014.

We will watch closely here because 3M took a serious breather before regaining all of its losses. Its much more aggressive dividend hike could be a sign that the company is more bullish on its future earnings than Wall Street is. All things being equal, we would only want to be aggressive buyers if the market (or 3M stock) pulls back.

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