3M Stock Upgraded Ahead of Earnings: 3 Things You Need to Know

By Markets Fool.com

It's earnings season on Wall Street, and the analysts are bullish.

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Major Dow components including Boeing, Caterpillar, and Coca-Colaare all set to report their earningsover the next few days. (The week is weighted heavily toward the front end of the alphabet.) One stock that Wall Street seems especially enthusiastic about, though, lies a bit farther down the list: Diversified manufacturer 3M Company (NYSE: MMM), which received a big vote of support from investment banker Barclays Capital this morning.

Here are three things you need to know about it.


Need a reminder that 3M is reporting earnings this week? This should help. Image source: Getty Images.

No. 1: A bullish prognosis

As reported on StreetInsider.com this morning, Barclays Capital has just upgraded 3M stock from equalweight to overweight. Simultaneously, the analyst assigned 3M a new and improved price target of $194.

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This new target suggests that 3M stock is now worth 13.5% more than Barclays previously estimated -- and 14.5% more than the stock currently costs. S&P Global Market Intelligence data show that 3M also pays a 2.6% dividend yield, resulting in a total profit potential of more than 17% for new investors over the course of the next 12 months -- if Barclays is right.

No. 2: Is Barclays right?

3M stock is up 17% already this year, and now Barclays is promising us 17% more to come. But why?

It's certainly not because the stock has been wowing us lately. In fact, last time 3M reported earnings, the "good" news was that revenue declined only 0.3% year over year. (The bad news was that profits dropped twice as much, down 0.7%.) Meanwhile, analysts have been steadily shaving their estimates for the current quarter's numbers. Three months ago, Wall Street was expecting to see $2.18 in profit per share for the quarter. At last report, that had dropped to $2.14.

What has Barclays feeling optimistic, though, is that the analyst believes that "the negative earnings revision cycle is nearing an end" (this, according to a write-up on TheFly.com). Good news, and more up-to-date guidance from management on Tuesday, could prove the analyst right about that.

No. 3: Is the price right?

Adding to Barclays's enthusiasm is the fact that while 3M shares are up 17% so far this year, they're actually down about 4.5% from recent highs hit a month ago -- and cheaper is better.

Barclays highlights this "recent pullback," in combination from the potential catalysts of a positive earnings report and more optimistic guidance, as setting up 3M stock to turn in another 17%-profit performance over the next 12 months.

The most important thing: Valuation

Of course, while 3M stock is cheaper today than it was last month, it's still not exactly cheap. At current prices, 3M shares sell for nearly 22 times earnings, and almost precisely 20 times free cash flow. (Factor in net debt, and the enterprise-value-to-free-cash-flow ratio is also about 22.)

That's not a horrible valuation in a market where the average S&P stock costs nearly 25 times earnings. But for a middling-growth stock like 3M, where earnings are expected to rise no more than 10% annually over the next five years, it's no bargain, either.

Now, could tomorrow's earnings upset this picture, and a strong profits statement make 3M stock look a whole lot cheaper than it currently appears today? Sure it could -- in theory. But it would take a real whopper of a quarterly profit to move the needle on 3M's 22 P/E ratio significantly. Personally, that's not something I would bet on seeing happen.

Forgive me, then, for taking issue with Barclays's upgrade -- but I think 3M stock remains too expensive to buy, no matter what happens tomorrow.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 324 out of more than 75,000 rated members.

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