Positive Call Could Propel 3M

Strong commentary on Friday's earnings call could spark another surge in shares.
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Editor's note: This column by Steve Birenberg is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight at 11:53 a.m. EDT on April 20. To sign up for Street Insight, where you can read Birenberg's commentary in real time, please click here.

3M's

(MMM) - Get Report

stock has a real chance of hitting a new high if the company provides positive commentary on its quarterly conference call Friday, scheduled for 9 a.m. EDT.

3M shares have surged recently, rising from just over $70 on Feb. 8, to around $82. The last $5 of that move has come just since the new quarter began. On April 4, the company announced that it was looking to divest its pharmaceutical division. This news was followed just two days later by a preannouncement of better-than-expected first-quarter 2006 revenue and earnings. These were the first two major news items since new CEO George Buckley joined 3M in early December.

3M shares were trading at $70 in July 2003, so the recent move up might be the start of a run back toward all-time highs of around $87, which they reached in March 2005. I believe 3M has a real shot at a new high and more in the next six months.

First, let's take a look at what the pharmaceutical divestiture might mean. The sale announcement was greeted well by investors. It was the first major move by Buckley, who came over from

Brunswick

(BC) - Get Report

.

I had followed Brunswick casually over the last few years and had been impressed by the company's performance in the tough boating industry. I liked the idea that 3M was a step up for Buckley. He has something to prove and that means he might be willing to initiate some new challenges and approaches at 3M.

The company had changed for the better under prior CEO Jim McNerney, who is now at

Boeing

(BA) - Get Report

. McNerney came from

General Electric

(GE) - Get Report

, where he was passed over for the top job when Jeff Immelt was promoted. McNerney put Six Sigma in place at MMM and the company's performance improved.

I am not sure exactly why, but operating momentum and excitement surrounding 3M shares stalled out in the past year as organic growth was falling short of targets. McNerney is a good CEO, but maybe it was time for another change at 3M.

The pharma sale might generate around $2 billion for 3M, not huge compared to the market cap of $61 billion, but the message the sale sends might be more important than the proceeds it generates. Strategically, the sale seems to be saying that Buckley is confident that more growth can be driven from 3M's remaining businesses, possibly with a greater focus on some of the industrial businesses.

My sense is that under McNerney, the company was looking for growth from the sexier businesses like health care and electronics. The conference call will surely have some questions about the pharma divestiture, including what it means strategically, as well as what the proceeds will be used for.

Broad Strength in Preannouncement

There shouldn't be much surprise from the financial numbers following 3M's preannouncement. The company guided to a range of $1.15 to $1.16 a share on organic revenue growth of 8%. Previous guidance called for $1.10 to $1.14 a share on 4% to 7% organic growth. 3M shares live and die on organic growth, so the new guidance is indeed good news.

In the guidance press release, management noted broad strength with contributions from the industrial, safety, consumer and electronics-related businesses. Health care was left out, so it will be interesting to see if results there are OK or fall a bit short.

3M shares are not all that expensive based on 2006 and 2007 EPS estimates of $4.61 and $5.09, respectively. The P/Es work out to 18 and 16 times, not bad for a high-quality blue-chip stock. If the commentary on the call indicates that the renewed organic growth witnessed in first-quarter 2006 is sustainable, estimates could rise. Current second-quarter estimates call for EPS of $1.15 on revenue of $570 million. Several analysts are already at $4.70 or higher for 2006 and the high estimate for 2007 is $5.25.

If estimates rise broadly toward these more optimistic levels, the shares could gain the double-barreled benefit of rising estimates and a rising P/E ratio -- 18 times a 2007 estimate of $5.25 gets the stock to $95. If the first-quarter 2006 momentum is affirmed and extended when 3M reports on Friday, look for the stock to start its move toward that level soon.

Editor's note: This column by Steve Birenberg is a special bonus for

TheStreet.com

and

RealMoney

readers. It first appeared on

Street Insight

at 11:53 a.m. EDT on April 20. To sign up for

Street Insight

, where you can read Birenberg's commentary in real time, please click here.

At the time of publication, Birenberg had no positions in 3M.

Steven Birenberg, CFA, is president and chief investment officer of

Northlake Capital Management, LLC

. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Prior to forming Northlake, Steve was a principal, director of research, and portfolio manager at Gofen and Glossberg, LLC. Prior to that, Steve was a trust investment officer at Star Bank in Cincinnati, Ohio. Steve has been managing portfolios and researching stocks for more than 22 years. Steve's research experience has included almost every economic sector with special emphasis on the media sector. Steve earned his Bachelor of Science in Business Administration from Miami University, Ohio. From 1987 through 1992, Steve taught at the CFA preparatory program the Study Seminar for Financial Analysts in Windsor, Ontario.