Note: This report contains substantial new material. Subsequent reports will have new or revised materials highlighted.
Reason for Report:Non-Earnings Update
Prev. Ed.:4Q17 Earnings Update, Mar22, 2018
Brokers’ Recommendations: Positive: 50.0% (6 firms) Neutral: 33.3% (4), Negative: 16.7%(2) Prev.: 6; 5; 2
Brokers’ Target Price: $234.67 (↓$22.83from the last report; 9firms) Brokers’ Avg. Expected Return:19.9%
Note: We do not have access to broker reports with a negative or equivalent outlook on 3M Company.
Portfolio Manager Executive Summary
3M Company is a diversified technology company. It manufactures and markets products for customers in the industrial, healthcare, consumer, safety and graphics, and electronics and energy markets.
Of the analysts covering the stock, 50.0% rated it positive, 33.3% assigned neutral ratings and 16.7% gave negative view. Target prices, with an average of $234.67, range from a low $200.00 to a high $285.00 per share.
Buy or equivalent outlook – Six firms or 50.0%–The analysts believe that 3M’s diversified operations reduce its exposure to any large cyclical swings, as they are typical of the industrial sector. The firms are impressed by the company’s capital allocation strategy which prioritizes reinvestment and localization of its expanding global footprint. These firms believe that 3M’s sustained profitability is attributable to its investment in research and development, efficiency in operations and cost control. Sustained sales momentums, stable margin along with growth in emerging market are the tailwinds. Hence, these firms continue considering 3M an attractive option for long-term investors.
Neutral or equivalent outlook – Four firms or 33.3%– These firms believe that the focus for 3M will increasingly shift to its ability to leverage its growing end-markets through successful acquisitions and portfolio optimization, as it actively works to streamline its footprint. The firms believe that 3M will focus on continued operational execution of its strategic initiatives, including footprint rationalization, strategic investments and global ERP rollout, as well as more aggressive M&A to boost end-market demand. These firms feel that continuous investments in value drivers act as a hedge against stiff competition, but this is also likely to hurt profitability to some extent, particularly when it comes to establishing local operations.
May3, 2018
Overview
Analysts have identified the following key factors for evaluating the investment merits of 3M Company:
Key Positive Arguments /Key Negative Arguments
- Compelling Fundamentals: 3M is committed to actively contributing to sustainable development through environmental protection, social responsibility and economic progress.
- Well Positioned: The company has a diversified presence across various sectors in domestic as well as global markets.
- Emerging Markets:3M is benefiting significantly from its businesses in the emerging markets. Developing markets are seen as the prime benefactor.
- Recognized Brand: The 3M brand is recognized and trusted around the world. Household names like Nexcare, Post-it, Scotch, Scotch-Brite and Scotchgard are market leaders. This has led to the household recognition of its brands across the globe.
- Focus on Key Levers: The company remains focused on three key levers, namely portfolio management, investment in innovation and business transformation for broad-based organic growth and expanded profitability.
- Economic Conditions: Weak economic conditions continue to prevail in certain markets, resulting in lowering of inventory levels by customers.
- Currency Risk:Foreign currency exchange fluctuations may affect the company’s ability to realize projected growth rates in its sales and earnings.
- Timing and Acceptance of New Product:The company’s growth objectives are largely dependent on timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to market at acceptable price points.
- Competition: The company faces tremendous local competitive pressure, whether it is in Brazil, China, India or Indonesia. 3M believes that to survive in the competitive environment, it will have to locally develop, manufacture, hire, purchase and lead. It recognizes that this involves a lot of hurdles.
Based in St. Paul, MN, 3M Company is a diversified technology company serving customers and communities with innovative products and services. It is a global enterprise, characterized by substantial intercompany cooperation in the fields of research, manufacturing and marketing. Its brands include Scotch, Post-it, Scotchgard, Thinsulate, Scotch-Brite, Filtrete and Command, among others.
The company operates through five segments; a brief discussion of them is provided below:
- Industrial segment offers tapes, coated and non-woven abrasives, adhesives, specialty materials, filtration products and others. Prime end-markets served are automotive, marine, aircraft, electronics, packaging, paper and printing, food and beverage, construction and specialty vehicles.
- Safety and Graphics segment provides products that ensure traffic safety and security as well as personal safety and security. Also, the segment deals in commercial solutions like commercial graphics, architectural design and others and roofing granules.
- Electronics and Energy segment serves customers in the communication, electronics, infrastructure protection, optical systems, renewable energy and other markets.
- Health Care segmentprovides medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and anti-microbial solutions.
- Consumer segment provides office supply products, stationery products, construction and home improvement products, protective material productsand consumer health care products.
Further details on the company are available at its website:
Note: 3M’s fiscal references coincide with the calendar year.
May 3, 2018
Long-Term Growth
3M remains committed to augmenting its organic growth through continuous investment in infrastructure and commercialization capability. 3M has initiated some prudent steps to strengthen and focus on its core portfolio of businesses. With broad-based organic growth and expanded profitability, the company remains focused on three key levers, namely portfolio management, investment in innovation and business transformation. The first lever is increasing customer relevance and allowing 3M to focus on its most profitable and fastest-growing businesses while making strategic acquisitions and divestitures. The company has trimmed its businesses from 40 to 24 since 2012. In 2018, 3M plans to increase investments in research and development to $1.9 billion or about 6% of sales for continued focus on the second lever. The third lever is enabling the company to better serve customers with even more agility and efficiency.
The company remains focused on inventing new products, with its scientists and innovators enjoying a competitive advantage worldwide. The continued capital expenditure with new product launches and increased focus on emerging markets should bolster its prospects across most end markets. Management believes that competitive pricing and localized production in emerging countries will help counteract macro pressures like sluggish growth, adverse currency movements and potential receivables exposure. The company is also working on biofuels and bio-based products, energy systems, carbon dioxide recycling and water management.
According to the analysts, 3M is a core holding and one of the highest quality franchises in the coverage. The company has a legitimate product strategy, driven by industry-high R&D spends which, over time, is crucial to outperforming the overall industry. The company’s growth drivers include strength in world economies, emerging markets, continued product innovation, commercialization, acquisitions, divestitures and strategic alliances.
3M continues to exploit dynamic growth opportunities in a broad range of economic sectors with its flexible product lines, ensuring a continually expanding global footprint. Going forward, 3M should achieve its long-term organic growth objective through continued cost control and proper leveraging of revenue growth, with help from additional tailwinds such as lower tax rates, higher share buybacks and pension.
During the five-year period of 2016–2020, 3M expects 8-11% rise in earnings per share driven by organic sales growth of 2-5%. The company expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%. Furthermore, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500-$700 million in annual operational savings by 2020 and an additional $500 million reduction in working capital. Such focused attempts to maintain growth momentum is commendable.
May 3, 2018
Target Price/Valuation
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 50.0%↑
Neutral / 33.3%↓
Negative / 16.7%↑
Avg. Target Price / $234.67↓
Digest High / $285.00↔
Digest Low / $200.00↓
Analysts with Target Price/Total / 9/12
Key risks include a slow and uncertain global economic recovery, excessive selling price declines as raw material costs increase; changes in short-cycle end-market dynamics; cyclical headwinds in end markets, particularly consumer electronics, industrial, or automotive; trouble in integrating recent acquisitions; and inability to accelerate top-line growth through sales & marketing and R&D investments.
Recent Events
On Apr 30, 2018, 3M announced FDA 510(k) clearance for its 3M Attest Super Rapid Biological Indicator (BI) System for Steam.
On Apr 24, 2018, 3Mreported results for 1Q18. Adjusted earnings in the quarter were $2.50 per share, in line with the Zacks Consensus Estimate. Revenues of $8,278 million topped the Zacks Consensus Estimate of $8,079 million.
On Apr 19, 2018, 3M Food Safety announced the integration of Elution Technologies, a Vermont-based manufacturer of test kits. The integration will help the company add 33 allergen specific lateral flow and ELISA (enzyme-linked immunosorbent assay) test kits to its product line.
On Apr 11, 2018, 3M announced the integration of its Filtrete Smart Air Filters with Amazon Dash Replenishment. The integration will result in automatic reordering of air filters which need to be replaced.
On Mar12, 2018, 3M paid a quarterly dividend of $1.36 per share to shareholders of record as of Feb 16, 2018.
On Mar 1, 2018, 3M’s unit — Ceradyne, Inc. received a supplementary $34 million contract to supply ballistic helmets to the U.S. Army. Combining this contract value, the Integrated Head Protection System contract for Ceradyne is valued in excess of $52 million.
Revenues
In 1Q18, 3M’s net sales were $8,278 million, reflecting 7.7% growth from the year-ago tally. The improvement was driven by a 4.2% positive impact from foreign currency translation, 2.8% from organic local-currency sales and 0.7% from acquired assets (net of divestitures).
Also, the top line surpassed the Zacks Consensus Estimate of $8,079 million.
From a geographical perspective, sales in the first quarter grew 3.5% in the United States, 10% in Asia-Pacific and 13.7% in Europe, Middle East and Africa (EMEA). Results were solid in Latin America/Canada as well, with sales expanding 4.3% year over year.
The company reports its revenues under the following heads/segments, which are briefly discussed below:
Industrial:The segment’s sales increased 7.1% year over year to $3,144 million on the back of strong performance in Asia Pacific, Latin America/Canada and the U.S. regions. Sales growth was primarily backed by higher sales of abrasives, automotive and aerospace, and industrial adhesives and tapes products
Health Care: The segment’s sales improved 7% to $1,536 million in the reported quarter. Higher sales were driven by growth in food safety, health information systemsand medical consumables. However, sales decline in drug delivery systems played spoilsport.
Consumer: The segment revenues were $1,127 million, up 5% year over year. The year-over-year improvement was primarily driven by increase of sales in home improvement and home care. However, the results were partially offset by sales decline in consumer health care.
Safety and Graphics: The segment’s sales increased 15% year over year to $1,783 million. The increase in sales was primarily attributable to higher sales in personal safety, roofing granules as well as commercial solutions.
Electronics and Energy: The segment’s revenues were $1,350 million, up 4.6% year over year. The year-over-year improvement in sales was backed by growth in electronics materials solutions.
Outlook
3M revised its 2018 guidance. The company currently anticipates earnings in the range of $10.20-$10.55 per share compared with the prior projection of $10.20-$10.70. Organic sales growth is expected in the band of 3-4%.
For 2018, 3M anticipates organic sales growth (in local currency) within 3-4% compared with the earlier projection of 3-5%.
Margins
As reported, 3M’s cost of sales increased 9.1% year over year to $4,236 million in 1Q18, representing 51.2% of total revenues compared with 50.5% in the year-ago quarter. Selling, general and administrative expenses, as a percentage of total revenues, were 31.1% while research and development expenses were 5.9%.
Operating profit in the quarter declined 42.2% year over year to $1,007 million while operating margin fell to 12.2%. Effective tax rate in the quarter was 17.6% versus 23.7% in the year-ago quarter.
Segment Details
Industrial: Segment operating income was up 7.3% year over year to $719 million while operating margin was recorded at 22.9%.
Health Care: Segment operating income increased 7% year over year to $460 million, while operating margin came in at 29.9%.
Consumer:Segment operating income decreased 2.4% year over year to $218 million, while operating margin was recorded at 19.3%.
Safety and Graphics: Segment operating income rose 21.1% to $483 million, while operating margin was 27.1%.
Electronics and Energy: Segment operating income surged 31.3% year over year to $337 million, while operating margin was recorded at 24.9%.
Outlook
For 2018, 3M anticipates tax rate to be within the 20-22% range, down from the previous forecast of 26-27%. The fall is due to the implementation of The Tax Cuts and Jobs Act (TCJA)2017 in the United States.
Earnings per Share
3M reported impressive bottom-line results for 1Q18. Earnings in the quarter were $2.50 per share, up 15.7% from the year-ago tally of $2.16 on growth in all operating segments.
Outlook
3M revised its earlier guidance for 2018. The company currently anticipates earnings in the range of $10.20-$10.55 per share compared with the prior projection of $10.20-$10.70. Organic sales growth is expected in the band of 3-4%.
Few brokerage firms increased their earnings estimates for 2018taking into account the cut in tax rates per the TCJA.
Feb 1, 2018
Research Analyst / Avisekh BhattacharjeeCopy Editor / Parijat Sen
Content Editor / Shradha Bardia
QCA / Supriyo Bose
Lead Analyst / Shradha Bardia
No. of brokers reported/Total brokers / 9/12
Reason for Update / 1Q18 Earnings Update
Zacks Investment Research Page 1