Is 3M Co (MMM) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does 3M Co (NYSE:MMM) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell 3M Co (NYSE:MMM)’s story, and we’ll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at 3M Co (NYSE:MMM)’s key statistics.

MMM Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	19.2%	Fail
Improving profit margin	(4.7%)	Fail
Free cash flow growth > Net income growth	(1%) vs. 13.6%	Fail
Improving EPS	16.3%	Pass
Stock growth (+ 15%) < EPS growth	59.7% vs. 16.3%	Fail

Source: YCharts.
*Period begins at end of Q2 2010.

MMM Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(16.5%)	Fail
Declining debt to equity	(27.9%)	Pass
Dividend growth > 25%	21%	Fail
Free cash flow payout ratio < 50%	40.5%	Pass

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going
3M Co (NYSE:MMM) doesn’t quite come through with flawless performance, as it’s only earned three out of nine possible passing grades. The combination of flat free cash flow and underwhelming earnings growth have damaged 3M in our tests, but these don’t have to be fatal wounds. Will 3M be able to turn this weakness around and rebound, or is the company going to have to settle for a below-average score for the foreseeable future? Let’s dig a little deeper to find out.

3M Co (NYSE:MMM)’s latest quarterly report gave investors revenue that was a shade below analyst predictions. Management blames poor economic conditions for the sluggish revenue growth, but they expect increased demand during the second half of 2013. The company will try to leverage lower-cost operations in China to expand its net margins. 3M’s presence in the developing markets also makes it attractive for long-term investors. Revenues from mature markets have been shrinking, but 3M has identified opportunities in its health-care and consumer segments. At present, 3M’s health care segment only pulls in 21% of its revenue from developing markets. That’s about $1.1 billion — a number that should be quite possible for 3M to double over the next few years.