Stock markets have had a pretty much unabated run up for last six months or so. Valuations are now stretched and investors are looking for less risky names. 3M Co. (MMM) could benefit from potential rotation into more defensive names as it has relatively underperformed especially since the end of 2Q10.
What an help MMM in the near term? Less leverage
With 0.3X LTM EBITDA/Net Debt, 3M's balance sheet is clearly underleveraged. As the industrial recovery has gained steam, MMM has lagged other more leveraged and later cycle industrials. Looking ahead, a potential rotation in less defensive names may help 3M.
M&A risk abating and return of cash to shareholders
3M's CEO is likely to retire in next 1-2 years. It seems less likely that 3M would pursue a large acquisition in advance of the possible senior leadership change given the risk that a large deal might be received poorly by the market. Thus, risk of overpaying is now reduced and the company can also opt to repurchase its shares at a faster pace.
Medium to long term risks still remains
Although MMM is likely to provide near tem share price upside/outperformance, I won't bet on any medium term outperformance. Main concerns in medium term include the difficult outlook in healthcare and optical films business, reducing profit margins for emerging markets and a difficult raw material outlook.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.