3M

-March 17, 2008-Marc Dessel

General info

• Ticker: MMM• Conglomerate • Large Cap• Five-star Morningstar Rating• Named 19th most admired U.S. company by Fortune Magazine

Many positives

• International exposure• Terrific product mix, innovation

• Positioned well in economy• Largest segments-industrial, health care

• Strong financial performance• Stock is undervalued

Major segments

• 6 segments

• 2006 Revenues• Industrial and transport 29.0%• Health Care 17.5%• Display and Graphics 16.4%• Consumer & Office 13.8%• Safety, security, protection services 11.6%• Electronics and Communications 11.5%• Other 0.2%

Products• Industrial and transport – abrasives, adhesives, tapes, coatings,

wiring, products to maintain military vehicles, products that can withstand high water pressure when drilling for oil

• Health Care – surgical supplies, infection prevention products, dental product

• Display and Graphics – optical film for LCD televisions and touch screens, computer screen filters

• Consumer & Office – stationary, consumer health products• Safety, security, protection services – protective glasses, energy

control products, roofing granules for asphalt shingles, protective gear for emergency responders

• Electronics and Communications – display tapes, high-performance fluids, wire connectors, circuits for ink-jet printers and cell phones

3M’s Brands

• Post-it notes• Nexcare bandages• Scotch tape• Command• Products in specialty stores, wholesalers

Distribution channels

• Directly-169 sales offices worldwide

• Indirectly-Retailers, wholesalers, specialty stores

International presence

• 2006 fiscal year revenue breakdown• United States 38.6%• Asia/Pacific 27.3%• Europe, Middle East, Africa 25.0%• Latin America 9.1%

• By 2011, Morningstar estimates over 65% of revenues will be international

• Highest margins in Asia and Latin America

Competitors• Avery Dennison Corporation• DuPont• Johnson & Johnson• Honeywell International• Tyco• Eastman Kodak• Corning• International Paper

SWOT Analysis

• Strengths • Strong research and development

-Morningstar estimates over next 5 years, 6-7% of revenues spent on R&D, same as previous years-Less cycle time – competitive advantage

• Diversified portfolio-products and geography19 acquisitions in 2006

• Strong financial performance

Company FundamentalsCriteria MMM Industry Performance

Current ratio 1.83 1.69 Outperforms

Interest coverage TTM 29.49 14.48 Outperforms

Equity multiplier 2.10 3.17 Outperforms

Receivables turnover TTM 7.57 2.89 Outperforms

Total asset turnover 1.06 0.54 Outperforms

Net profit margin % 16.97 12.59 Outperforms

ROA % 18.05 6.15 Outperforms

ROE % 37.74 21.76 Outperforms

Projected 5-year EPS growth %

17.53 11.46 Outperforms

EPS growth > sales growth of MMM % TTM

10.26 6.71 Outperforms

Revenue growth % TTM 6.71 12.84 Underperforms

Forward Valuation AnalysisCriteria MMM Industry Performance

PEG 1.2 1.1 Underperforms

P/E 14.13 15.75 Outperforms

Dividend yield % 2.53 2.96 Underperforms

Time series analysis2003 2004 2005 2006 2007

• Earnings per share 3.02 3.75 4.12 5.06 5.60• Dividends per share 1.32 1.44 1.68 1.84 1.92• ROE % 34.6 32.7 31.2 38.4 37.7• ROA % 14.6 15.6 15.5 18.4 17.8• Gross margin % 49.1 50.2 51.0 48.9 47.9• Debt/equity 0.22 0.07 0.13 0.11 0.34• Asset Turnover 1.11 1.04 1.03 1.10 1.06• P/E 28.2 21.9 18.6 15.4 14.1

Weaknesses

• Poor inventory management Inventory turnover - 4.67Industry average - 8.32

• Increasing costs to health care segment-Restructuring – sold personal care unit, branded pharmaceuticals unit, severance pay

Opportunities

• Growing demand for LCD’s – optical films• Rising health care spending in U.S.• Global expansion – 19 new or expanding manufacturing

plants – China, Mexico, Poland, South Korea, India, Russia-To shorten supply chain – only 35% of manufacturing is outside U.S. while 60% of revenues outside.

Threats

• Growth in private labels• Global economic slowdown• Exchange rate fluctuations

Undervalued• Current price:$77.53• Beta 0.82• 52-week range $72.05 – $97.00• Morning Star fair value $97.00• Yahoo 1-year target estimate $94.18• 2-stage DDM model – intrinsic value $87.94

Margin of safety 15% –$74.75 – $101.13 -outside estimate of growth – 10.7% -payout ratio – 34.3%-discount rate – 7.82%-high growth rate – 13.30%-stable growth rate – 6%

One-year chart

                                                                                                                                                                                                                                      

Two-year chart

                                                                                                                                                                                                                                      

Insider Activity

• According to Morningstar website, executives have been purchasing the stock

• Nov 12 – 9 Directors purchased shares at $93.58• Feb 11 – 4 Directors purchased shares at $85.09• March 3 – 3 Executive VP’s purchased 25,481 shares

each at $78.49.

Competitive advantages

• Innovative – organic and inorganic growth• Manufacturing capability• Distribution network• Strong margins

Recent developments• 2007 Fourth quarter earnings in line with expectations –

-$1.19 per share, market expected $1.17, Health care and safety and security experienced highest growth-Internal growth – 5% during 2007-U.S. growth only - 1.6% during 2007

• Feb 11 – Declared a 50 cent per share dividend for first quarter 2008. 4.2% greater than dividend for first quarter of 2007. 366th consecutive quarterly dividend and 50th consecutive year of at least one dividend increase

• March 4 - Acquired Hitech Polymers Inc. The company makes specialty

thermoplastic polymers that are used to manufacture plastic bottles, molded parts, valves, and pumps for construction and transportation

Recommendation

• Purchase 50 shares• Approximately, $3900

-Increase diversification to portfolio-Larger weights in industrial, health care areas (top-down analysis)-Undervalued-Innovative company – organic (5% for 2007) and inorganic growth (19

acquisitions in 2006)-Strong financial performance