3M Shares Still Have Value, Even if They Are Expensive

NEW YORK (TheStreet) -- 3M (MMM)   shares aren't cheap. You can tell that by how the stock has moved sideways since hitting an all-time high in June. But 3M does have value -- investors just have to know where to look.

The stock, at close to $144,  is about where it was on June 6. Shares are up just 2.6% on the year to date, trailing the 3.3% gain of the Dow Jones Industrial Average.

At a price-to-earnings ratio of 20, I can see why Wall Street is hesitant to pounce on 3M, the conglomerate best known for its tape products. That's one full point lower than Johnson & Johnson (JNJ) and almost two points lower than another conglomerate like Honeywell (HON) .

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But 3M is trading at that valuation for a reason. The company consistently delivers where it matters -- on the bottom line. Very seldom do good companies get cheap, especially one that has an gross margin that is 17 points higher than the industry average (48% vs. 31%), according to Yahoo! Finance. By contrast, Honeywell trails the industry gross margin by three points.

What's more, not only is 3M outperforming General Electric (GE) in revenue growth, 3M almost doubles GE in operating margins (22% vs. 12%). Yet, GE enjoys a P/E that is one point higher. In other words, "expensive" doesn't always mean what it implies. In the case of 3M, the market has gotten this story wrong.

This is a company that is operating an efficient business. Thanks to diligent cost controls, management is building the sort of operating leverage needed to grow both net earnings and earnings per share. In the most recent quarter, these grew by 6% and roughly 12%, respectively. Very few companies -- and none that are cheap -- are able to deliver that sort of return.

The other thing is, investors sometime forget that 3M is more than just Post-it notes. 3M is also a well-respected name in areas like health care, electronics, energy and safety, among others.

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In fact, the company just announced that its subsidiary, 3M New Ventures has taken an equity stake in Smart Energy Instruments, a Canadian company that develops electronic chipsets for smart grids. This is an industry that is projected to grow $50 billion by 2023.

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