More Grinding For 3M

Reading over some of recent earnings write-ups, I realize that I'm often complaining that Wall Street isn't giving a lot of my portfolio companies what I consider to be a fair shake. But given that I deliberately seek out the unloved, misunderstood, and undervalued, what else should I expect?

Consequently, while it seems that analysts and institutions aren't going to go out of their way to love 3M (NYSE: MMM), that is just part of my investment thesis. While 3M's fourth quarter results were not super, they were okay and the impressive free cash flow production here has me content to hang on a while longer.

Quick Review Of The Quarter

3M had a fourth quarter that was good enough for a fundie like me, but probably not good enough to impress the Street. Revenue rose 9.6% (8.6% organic) to just over $6.7 billion; enough to beat the consensaguess by about $100 million, but a fair bit short of the high estimate. Although Health Care and Safety did okay from a top line perspective, a lot of other segments (Industrial, Consumer/Office, Display, and Electro/Comm) were a bit softer than I'd like.

Unfortunately, it got a little worse on the margin side. For reasons that weren't completely obvious from the press release, the margins in the Display business were disappointing, and that certainly weighed down the total performance. Given that Display is a lucrative business (but one where competition has been expected for some time now), that could be a problem going forward.

All in all, 3M's operating margins were a bit disappointing and the company's bottom-line EPS performance was a little better than expected, but nothing to get excited about. On a happier note, the company did a fair bit better than I expected for full-year free cash flow, and that matters to me a great deal more than a quarterly margin or EPS number.

Bottom Line

While I'm discouraged by the performance in Display, strength in Health Care is good to see. I would have liked to have seen 3Mbump up its organic revenue growth estimate for the year, but I suppose it is better to under-promise at this point rather than disappoint the Street.

3M has a valuable health care franchise (with real strength in dental, infection prevention, and wound care), as well as strong positions in segments like adhesives, abrasives, paint/finish/filler, optical films, and personal safety gear. True, the company competes against well-heeled foes like Johnson & Johnson (NYSE: JNJ), Danaher (NYSE: DHR), Covidien (NYSE: COV), Kimberly Clark (NYSE: KMB), DuPont (NYSE: DD), BASF (Nasdaq: BASFY), Avery Dennison (NYSE: AVY), Tyco (NYSE: TYC) and many others, I think 3M is more than holding its own in most of these markets.

A have a fair value estimate of $106 on 3M shares now, so I'm holding what I have and would consider buying more on a dip.

I would BUY 3M shares.

Disclosure: I own shares of 3M and JNJ