In January, Post-it product manufacturer 3M Company (NYSE: MMM) reported fiscal 2016 fourth-quarter earnings that beat analysts’ estimates. The company also reaffirmed its fiscal 2017 earnings guidance. On that basis, we had published an article on January 26th, recommending an investment in a call option offered by any of the suitable binary brokers. The stock, which was trading at about $173 at that time, rallied to close near $178 in a week. Correspondingly, the call option expired in the money. However, the rally did not stop there. The stock recorded a new yearly high of $191.96 last week. The rally was aided by the company’s acquisition of a safety gear business owned by Johnson Controls. Still, on the basis of the details provided below, we anticipate a correction in the stock.
The Minnesota-based company acquired Scott Safety, a subsidiary of Johnson Controls, in a deal valued at $2 billion. The North Carolina based Scott Safety manufactures respiratory and protective equipment for industrial workers, firefighters, US military and police squads. The fiscal 2016 revenue of Scott Safety was $570 million.
In an effort to remain focused and improve customer relevance, 3M has trimmed its business from 40 to 26 in the past five years. In the next five years, the company expects an 8% to 11% growth in the EPS. Organic revenue growth is anticipated in the range of 2% to 5%. 3M is also in the process of implementing a new ERP solution, which is expected to result in a savings of between $500 million and $700 million per annum in 2020. Additionally, operational expenses are forecasted to decrease by another $500 million. However, it can be noted that most of the uptrend was based on the basis of future growth prospects.
In the past month, the company has reported several notable insider transactions. On February 15th, 3M’s Executive Vice President Michael Vale sold 10,440 shares at an average price of $181.68. On the same day, Joaquin Delgado, who is also an Executive Vice President, sold 1,142 shares at $181.62 per share. A day earlier, the company’s Senior Vice President, Paul Keel, sold 8,440 shares at $181.24. From this, it can be inferred that the insiders feel the valuation of the stock is overstretched.
The stock trades at a PE ratio of 23.3 and a price-to-book (PB) ratio of 11.02. The historic PE average of the S&P 500 is 21.1. Similarly, the historic PB ratio of the S&P 500 is 3.9. The five-year PB ratio of 3M is only 11. This indicates that that stock is relatively overpriced, and fundamentally there exists a high probability of a correction.
The strong resistance seen at 193 in the price chart, may result in a technical correction. The argument also draws strength from the RSI oscillator which is forming lower highs. The RSI indicator has also formed a negative divergence with the price. So, a trader should take these technical aspects into consideration before setting up a trade.
On the basis of the above analysis, a put option is recommended for purchase. The trader should also ensure that the contract remains valid for a week. It would also favor the trader if the contract is bought when the stock trades above $192 in the exchange-traded market.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
