3M’s forward price-to-earnings multiple
As of December 6, 2017, 3M’s (MMM) one-year forward PE (price-to-earnings) multiple was 24.9x compared to its peer Honeywell International’s (HON) multiple of 19.8x. A forward PE multiple takes future earnings into consideration.
This valuation method helps investors compare two or more companies operating in the same industry and helps them judge which company is overvalued and which one is undervalued.
MMM’s valuation at a premium: Is it overvalued?
MMM has been trading at a premium to its industrial peer HON. Both HON and MMM had good 3Q17 earnings and have beaten analysts’ estimates. MMM has consolidated its business portfolio from 40 to 25, which would help bring more operating efficiency and lower costs. As a result, analysts are expecting MMM’s fiscal 2018 EPS (earnings per share) to be $9.63, implying a growth of 6.3% over the estimated fiscal 2017 EPS.
Analysts have projected HON’s fiscal 2018 EPS at $7.78, implying a 9.7% rise over the expected EPS for fiscal 2017. Compared to MMM, HON has better-than-expected EPS growth in fiscal 2018, indicating that MMM might be overvalued. MMM’s forward PE (price-to-earnings) multiple is far higher than its peer group, which has a one-year forward PE multiple of 18.1x.
Investors can hold MMM stock indirectly by investing in the Vanguard Industrials ETF (VIS), which has 3.5% of its portfolio in 3M. Other VIS holdings include General Electric (GE) and Boeing (BA) with weights of 8.8% and 3.2%, respectively, as of December 6, 2017.