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3M: Terrific Company, Good Stock

Below I have included the precise same Earnings and Price Correlated graph as first demonstrated. However, this time I added price (black line) and a "normal" P/E ratio (blue line). Here we see that 3M's market price previously began to deviate from its justified earnings growth; starting to become undervalued during the most recent recession and coming back to fair value as of late.

Today 3M appears slightly over-valued to fairly valued in relation to its historical earnings and relative valuation. 3M has a current P/E of 18, while over the past 15 years has commanded a normal P/E ratio of about 19.

However, the normal P/E ratio can be a bit misleading in a static graph. With the above graph, notice that 3M had a price that was much higher than a 19 P/E in the early-2000's, but recently has been priced such that its P/E is significantly less than the "normal" mark.

In observing this, F.A.S.T. Graphs has the ability to view the company in a range of anywhere from 2 to 20 years. For instance, a 6-year Earnings and Price Correlated graph demonstrates that 3M had a normal P/E of just 14.8 in the last 6 years.

A case could be made for a premium valuation; however, I believe it's prudent to concentrate on a P/E around 15 in making assumptions moving forward.

Eighteen leading analysts reporting to Standard & Poor's Capital IQ come to a consensus 5-year annual estimated return growth rate for 3M of 11%. A quick check to Zack's data provides a similar range of estimates.

In addition, 3M's current P/E of 18 is at the very top of the "value corridor" (defined by the orange lines). If the earnings materialize as forecast, 3M's valuation would be $168.28 at the end of 2018, which would be a 9.1% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

Now it's paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company.

In other words, depending on what you believe might be a reasonable valuation multiple, the performance results of 3M could trail the business results of the company moving forward. That is, in viewing the past history and future prospects of 3M, we have learned that it has been a terrific company, but presently is perhaps just a good stock. However, as always, I recommend that the reader conduct his or her own thorough due diligence.

At the time of publication, Carnevale was long JNJ.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Charles (Chuck) C. Carnevale is the creator of FAST Graphs.

Chuck has over 43 years of financial experience and is the co-founder of the earnings and price correlated, powerful fundamentals analyzer software tool - FAST Graphs. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck's work stressing sound valuation has been widely published on numerous financial sites and blogs. Chuck is passionate about spreading the critical message of valuation and prudence in fundamental investing. So much so that regular readers have dubbed him "Mr. Valuation". Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.

Chuck believes that correctly assessing fair value is one of the primary keys of successful stock investing, and he has dedicated his more than 40 years of experience in finance to its pursuit. Chuck agrees with legendary investors such as Warren Buffett, who recognize how important it is for investors in common stocks to possess an intelligent framework for making sound decisions that can keep emotions out of the equation. With making smart stock selections, there is no room for fear and greed.

Chuck was fortunate to learn at an early age that earnings drive long-term stock prices, and that dividends, if any, will be paid out of a company's earnings. This led him to develop FAST Graphs, the fundamentals analyzer software tool that reveals the long-term relationship between a company's earnings and its stock price and dividends over time. Chuck is most interested in the business behind the stock.
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