Buy MMM Calls: 3M Company is Diversified for Profitability

We end another interesting week of trading stock options today as we explore the options of 3M Company (NYSE:MMM). 3M with its market capitalization of $93.32B is a diversified technology company. The company operates in five segments namely, industrial, safety and graphics, electronics and energy, healthcare, and consumer segment.

Strong Second Quarter Results

3M reported strong second quarter (Q2 2014) results on July 24 to show continued growth in its top and bottom lines as all its business segments delivered profitability. Highlights of the second quarter results are presented below:

  • Organic local-currency sales growth of 4.8 percent
  • Earnings of $1.91 per share, up 11.7 percent
  • Operating income margins of 22.8 percent, up 0.8 percentage points year-on-year
  • Free cash flow conversion of 103 percent
  • Returned $2.0 billion to shareholders via dividends and gross share repurchases
  • Announced (July 16) acquisition of remaining 25 percent of Sumitomo 3M subsidiary for 90 billion Japanese Yen (approximately $885 million)

The result by segments paints an interesting picture with respect to the company’s profitability as seen below.

The industrial segment reported sales of $2.8B to mark 4.9% gains from the same quarter last year. The safety and graphics segment reported sales of $1.5B to mark a 6.2% year-over-year increase. The electronics and energy segment reported sales of $1.4B up 6.2% from the same quarter last year. The healthcare segment reported sales of $1.4B to mark a 5.9% increase from the same quarter last year. The consumer segment reported sales of $1.1B to mark a 3.7% increase from the same quarter last year.

Reasons to Buy MMM Calls

  • Valuation

3M currently has a P/E ratio of 20.3 compared to an industry average of 19.9 and a P/E of 18.2 in the S&P 500. In addition, shares of 3M have traded in the range of 12.2X and 20.9X trailing 12-months earnings with a 5Y average of 16.6. However, the fact that shares of 3M trades at a premium to the industry average and the S&P 500 is not a cause for concern considering its other metrics.

For instance, 3M has a Price/Book ratio of 5.4 compared to an industry average of 2.8 and the S&P 500’s book value of 2.6. In addition, 3M has Price/Sales ratio of 3.1 compared to an industry average of 1.9. 3M’s Price/Cash Flow of 16.6 trashes the industry average of 5.9.

  • Technical Indicators

MMM Stockchart

The stock chart above plots how the shares of 3M have traded in the year-to-date period. To start with, 3M has a 52-week low of 112.58 and a 52-week high of 146.43 to make a 30.06% difference in trading range. Shares of 3M have gained 6.32% in the year-to-date period to trade around $143.63 per share as at 2:57PM EDT. The stock is also trading above its 50 and 200-day moving averages as it seeks to obtain support above the 50-day moving average. The stock’s RSI of 55.40 further lends credence the fact that the buying action is just starting out on the stock.

How to Trade MMM Options

From the foregoing, it is clear that bullish plays are the smartest move on this stock going forward. I have a $155 price target on the stock in the next 6 months and I will buy calls with that price target in mind. I recommend buying the MMM Jan 2015 155.000 call (MMM150117C00155000) at an asking price of $1.05.

— Daily Option Alerts

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