netrashetty
Netra Shetty
3M Company (NYSE: MMM), formerly known as the Minnesota Mining and Manufacturing Company, is an American multinational conglomerate corporation based in Maplewood, Minnesota, a suburb of St. Paul.
With over 76,000 employees, they produce over 55,000 products, including: adhesives, abrasives, laminates, passive fire protection, dental products, electronic materials, medical products [6] electronic circuits and optical films.[7] 3M has operations in more than 60 countries – 29 international companies with manufacturing operations, and 35 with laboratories. 3M products are available for purchase through distributors and retailers in more than 200 countries, and many 3M products are available online directly from the company.
3M Co. sells a wide range of products to a diversified base of customers around the world and has no material concentration of credit risk. Revenue is recognized when the risks and rewards of ownership have substantively transferred to customers. This condition normally is met when the product has been delivered or upon performance of services. 3M Co. records estimated reductions to revenue or records expense for customer and distributor incentives, primarily comprised of rebates and free goods, at the time of the initial sale. These sales incentives are accounted for in accordance with ASC 605, Revenue Recognition. The estimated reductions of revenue for rebates are based on the sales terms, historical experience, trend analysis and projected market conditions in the various markets served. Since 3M Co. serves numerous markets, the rebate programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. Free goods are accounted for as an expense and recorded in cost of sales. Sales, use, value-added and other excise taxes are not recognized in revenue.
The majority of 3M’s sales agreements are for standard products and services with customer acceptance occurring upon delivery of the product or performance of the service. 3M also enters into agreements that contain multiple elements (such as equipment, installation and service) or non-standard terms and conditions. For multiple-element arrangements, 3M recognizes revenue for delivered elements when it has stand-alone value to the customer, the fair values of undelivered elements are known, customer acceptance of the delivered elements has occurred, and there are only customary refund or return rights related to the delivered elements. In addition to the preceding conditions, equipment revenue is not recorded until the installation has been completed if equipment acceptance is dependent upon installation, or if installation is essential to the functionality of the equipment. Installation revenues are not recorded until installation has been completed. For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates the costs are incurred on other than a straight-line basis. License fee revenue is recognized as earned, and no revenue is recognized until the inception of the license term. On occasion, agreements will contain milestones, or 3M will recognize revenue based on proportional performance. For these agreements, and depending on the specifics, 3M may recognize revenue upon completion of a substantive milestone, or in proportion to costs incurred to date compared with the estimate of total costs to be incurred.
roperty, plant and equipment, including capitalized interest and internal engineering costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-line method based on the estimated useful lives of the assets. The estimated useful lives of buildings and improvements primarily range from 10 to 40 years, with the majority in the range of 20 to 40 years. The estimated useful lives of machinery and equipment primarily range from three to 15 years, with the majority in the range of five to 10 years. Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.
3M is a diversified manufacturer with one of the highest international presences of any multi-industry company. With products such as Post-It Notes and Scotch Tape as well as high-tech LCD films, 3M develops innovative new products while turning a profit off of old favorites. 3M operates in six business segments: Healthcare, Industrial & Transportation, Consumer & Office, Display & Graphics (D&G), Electro & Communications, and Safety, Security & Protection. 2009 sales totaled $23.1 billion, down 8.5% from 2008, and 2009 net income was $3.31 billion compared to $3.65 billion for 2008.[1]
3M is becoming increasingly global: in 2009, 63% of 3M's total revenue came from outside the United States.[2] Its international penetration makes 3M well-positioned to take advantage of growing economies such as those of India and China, China, and Brazil. In the first quarter of 2010, overseas sales grew 47% year-over-year, while sales in United States were up by 11%.[3]
3M has stepped up acquisitions of smaller international companies to spur overseas and portfolio expansion. In April 2008, 3M acquired Aearo Holding Corp, a company that manufactures and sells personal protection and energy absorbing products. This added hearing, eye, and fall protection to 3M's offerings. [4] In September 2009, 3M CEO George Buckley said it will acquire "different businesses" over the next year to continue to augment its product offering, [5] and will spend $1 billion from Oct 2009 to Oct 2010 on acquisitions. [6] In September 2010, the company said it would be buying Cogent, a maker of finger, palm, face, and eye biometric devices.[7] The company is looking to buy products and brands that are well-known in their domestic markets in order to accelerate penetration of foreign markets. [6]
Business and Financial Metrics
3M's 2009 revenue totaled $23.1 billion, an decrease of 8.5% from the year before.[8] It's operating income and net income, however, experienced drops of 9.3% and 7.7%, respectively, from the year before.[9] The drop offs in operating and net income can primarily be attributed to restructuring actions, exit activities and a loss on sale of businesses.[10]
Business Segments
3M Company had a rocky start in 1902 as "Minnesota Mining and Manufacturing," an almost-failed mining company. In 2002 it changed its name to 3M; today the company is a diversified industrial and consumer products company operating six business segments. 3M sells the majority of its products to retailers or other large distributors; some large companies and hospitals have direct accounts with 3M for their more specialized technologies.
Best known for brands including Scotch tape, Post-It, and Nexcare, 3M makes over 55,000 products ranging from sandpaper and bandages to wide screen LCD TVs. The thread that unifies the majority of 3M’s products is that they are based on applying coatings to backings (e.g., sandpaper). Divisions with key product offerings are listed below:
Healthcare (18.6% of sales)[8]: Medical Supplies; Skin Products; Pharmaceuticals (sold in 2007); Drug Delivery Systems; Dental / Orthodontic; Health Information Systems; Microbiology
Industrial & Transportation (30.8% sales)[8]: Abrasive Systems; Industrial Adhesives; Personal Care; 3M Dyneon; CUNO; Specialty Materials; HighJump Software; Aerospace; Packaging; Automotive
Consumer & Office (15% of sales)[8]: Stationary; Office; Home Care; Protection; Construction; Home Improvement; Visual Systems
Display & Graphics(13.5% of sales)[8]: Optics Systems; Commercial Graphics, Traffic Safety Systems; Touch Systems
Electro & Communications (9.8% of sales)[8]: Electronics Solutions; Electric Markets; Communications Markets; Electronics Material Markets
Safety, Security & Protection (13.8% of sales)[8]: Industrial Minerals; Commercial Care; Security Systems; Building Safety; Corrosion Protection; Occupational health; Environmental Safety
Business Drivers
International v. Domestic Economies
Strength in growing markets overseas
While the North American economy could continue to remain sluggish, it appears that overseas industrial markets continue to shine. This should bode well for 3M, considering that more than 60% of 3M’s revenues are derived from outside of the U.S. Furthermore, should the dollar remain weak, 3M could continue to benefit from it and other exchange rates. Considering that 3M’s products are largely positioned as consumables (e.g., filters, Post-it notes), growing international demand for 3M products should directly correlate with rising disposable income in developing economies over time. To this end, 3M expects annual revenue growth rates of between 15 and 30 percent for China, Russia, India, the Middle East, and Eastern Europe.
This will become increasingly important for 3M's largest international market: Asia. China, Japan and India are three particular markets where 3M has significant opportunity to claim market share due to growing economies and large populations. To target these opportunities, 3M has dedicated $500 million of incremental spending to expand capacity in the next two years in high-margin businesses like Safety, Security & Protection. The company estimates that it could be capacity constrained for up to 20% of its current volumes. In 2006, 3M announced new capacity expansion plants in Poland and Korea. In addition to these two initiatives, 3M has also announced plans to aggressively expand in Asia with four plants currently under construction in China.
In January 2010, the company said it expects sales in Central and Eastern Europe to grow over 20% annually for the next five years, with Poland providing the bulk of its regional production. Poland was the only European Union member to survive the global economic downturn without entering a recession. [11]
Domestic slowdown
The American economy has recently felt the effects of a housing market bubble. Housing wealth is expected to decline in 2007, which could result in a decrease in U.S. consumer spending. An estimated 6% of 3M revenue is directly tied to North American consumer habits, especially for the Display & Graphics division, for which a third of sales are domestic and most LCD televisions are screens sold to end consumers. (See Home Entertainment Growth.) However, in the first quarter of 2010, LCD televisions shipments have rebounded and should benefit the division, according to Morgan Stanley. [12]
Downsizing Pharmaceuticals area
3M completed the sale of its pharmaceutical division in January 2007 to multiple buyers for a combined $2.1 billion. This sale will allow 3M to focus on core product areas while still maintaining manufacturing rights for its former pharmaceutical products, a term negotiated in the divestiture.
Its European branded pharmaceuticals business has been sold to Meda AB, a Sweden-based drug-marketing company. Asian operations went to Ironbridge Capital and Archer Capital, two Australian private equity firms. U.S., Canadian, and Latin American operations went to Graceway Pharmaceuticals Inc.
LCD films
3M's proprietary products work to make flat panel display screens brighter by refracting usable light towards the viewer and recycling unusable light back through the display without absorbing light waves. This product is used mainly in notebook PCs and hand-held devices and to a lesser extent in TVs and monitors to make electronic displays more vibrant and thereby allowing a reduction in energy usage for these products by 50-70%.[13]
Once the industry leader in this market, sales at 3M's Display and Graphics division dropped 6% during Q1 2008 and 16% during Q2 2008.[14] This massive fall-off was caused when a low-cost producer entered the optical films market and began selling a lower quality film for a fraction of the cost of 3M's films. As a result, producers of electronic displays found it more profitable to buy cheaper/lower-quality films and simply engineer other aspects of their displays to achieve the brightness and definition traditionally achieved by optical films. This market development has resulted in a 2/3 drop in sales for the Display and Graphics division.[15]
Growth through acquistions
Historically 3M has focused on organic growth, but recently it has become increasingly interested in acquisitions, especially in emerging markets. In October 2009, 3M CEO George Buckley said that the company intended to make 10-20 acquisitions in varying industries for a total cost of about $1 billion.[16]
One of the major expansion areas for 3M has been the market for LCD screens. The company dominates the global market for brightness enhancement films that are used by the flat panel display (FPD) industry for LCD applications in products such as LCD televisions, notebooks, desktop monitors, cell phones, and handhelds. The monitor market has historically been the largest piece of 3M’s LCD film sales. Its 2005 flat panel display film business breakdown was 60% monitors and TVs, 25% handhelds; and 15% notebooks.
Sensitivity to product cycles, seasonality
3M's fortunes in the flat panel display business are highly tied to the overall product lifecycle of these types of televisions and monitors. As the FPD business becomes more mature, prices decrease and margins are squeezed. 3M already saw decreases in its operating margins from 2005 to 2006, dropping from 33% to 28%.
On the upside, the 2006 holiday season created a major boost in LCD screen sales and consumers demanded larger TV and monitor screen sizes. 3M benefits from this trend because the company sells its films by surface area. Additionally, the 2008 Olympics in China could provide a significant boost for LCD television sales in China and elsewhere.
Increasing raw materials prices
Given the specialty chemical content that characterizes many of 3M’s products (i.e., adhesion and abrasion properties), raw materials and their associated prices can significantly influence the company’s margins. In addition to components and compounds, 3M consumes various energy products including natural gas. Over the past few months, the prices of key raw materials –-copper, natural gas, toluene, ethylene, ethane, benzene and polyethylene--have been on the rise trend, potentially hurting 3M's margins. Management expected the company's raw material costs to increase 3-4% for 2008.[17] These price increases affect 3M through greater manufacturing, energy, and transportation costs. Furthermore, while the weaker dollar is good for 3M's sales, it has also effectively increased the cost of raw materials imported from outside the U.S. As of mid-2008, management has successfully mitigated these effects by increasing the price of 3M products more than the cost increases for raw materials.
Environmental Lawsuits
3M has been subject to lawsuits within the United States for the operation of its chemical plants. In 2008-2009 Minnesota lawsuit, three households allege that 3M scientists knew 3M was producing harmful chemicals but failed to report it, causing house values to decline in the area. Attorneys for 3M said the chemicals were introduced when there were few pollution laws. 3M also has said the trace levels of chemicals in water aren't a health threat. [18]
Competition & Operational Metrics
Since 3M operates in six different business sectors, it faces various smaller, more specialized companies in singular areas and a few larger companies cross sector, such as Tyco International (TYC). Industry & Transportation, Healthcare, and Display & Graphics, are the three greatest contributors to sales for 3M, so operational metrics for these three sectors should be examined separately.
Since 2004, as 3M experienced increased competition in its Brightness Enhancement Films area, organic growth and margins for the segment have come under more pressure. Its Dual Brightness Enhancement Films technology faces less pressure from competitors, but operating margins may decrease as a result of pressure on LCD screen manufactures to cut costs as the LCD industry becomes highly competitive.
2008 Market Share in the Brightness Enhancement Film Market:
3M (80%)
Nitto-Denko (19%)
Mitsubishi Reyon(1%)
In 2009, the healthcare business proved to be the company's fastest growing business by sales, with revenue rising at 6%, twice the company average. 3M benefited in early 2009 from the avian flu epidemic, which boosted sales of N95 face masks and other hygenic products.[19] In this space, 3M competes with firms such as Procter & Gamble Company (PG), Kimberly-Clark (KMB), and Clorox Company (CLX).
Before examining the financial statements of 3M, it is vital to understand the variety of activities this company performs. According to Reuters, 3M is a "diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications." The industrial and transportation business includes products such as food and beverage, personal care, and automobiles. More specific industrial products include polyester, foil, and tape. Specific transportation products are insulation components like catalytic converters. The health care segment produces supplies for medical, surgical, and dental use. The display and office business employs workers to produce stationary products, supply products, and home-improvement products. Office products like Post-it Memo Pads are also produced in this section. 3M also controls a safety segment and an electro and communications section, where the latter creates products including telecommunication fiber-optic products.
The main idea to take from the different business of 3M is the hedging strategy. Instead of focusing on only one industry, 3M can have a section of its business prosper, while another section's growth slows. It is true that 3M may not experience any incredible share price appreciation because of its strategy, but 3M will not experience any dramatic share price fallout either. As evidence, since 1999, 3M has only had one distinct negative share price calendar year (2005), and that year only yielded a loss of 6%. Each year during this timeline before and after 2005, 3M has been flat or shown share price appreciation. In 2006 the share price rose about 5%, and so far in 2007 the share price is up over 30%. Throughout this period, the US economy has been through exuberant growth to panicked recession. However, because of 3M's strategy and investor's trust in such a well-respected brand, 3M has managed to avoid so terrible economic periods.
While, 3M's business model is great, there are many other corporations in this industry that have similar strategies. What differentiates 3M however is its fundamentals. Over the last fiscal year, according to Reuters, 3M saw revenue at $22.9 billion dollars. This is an outstanding number. What is more outstanding is relative sales growth. 3M's recent sales figure was 7.86% higher than it was the previous fiscal year. Not only is this increase higher than its five year average, but it is also higher than the five year average of the conglomerate industry. Considering the size of sales volume, this is a great sign of growth. What is even more outstanding is earnings growth. 3M has been efficient with its costs and saw an increase in profits of over 32.76% last fiscal year. This number is higher than the company's five year average at 23.13% and also higher than the industry's average at 13.87%. Comparing this figure to industry competitors, United Technologies only saw a 13.72% increase during the same time period, Emerson Electric saw a 20.26% increase, and GE only had profits grow by 12.16%. Clearly 3M is growing and using good internal controls to reduce cost.
Another way of illustrating 3M's strong growth is through its margins. Gross margins for 3M at 47.94% are quite high compared to the industry's average at 39.01%. 3M's gross margins are also higher than United Technologies' 26.78% figure, Emerson's 35.70% number, and GE's 42.83% margin. In addition, 3M's operating margins at 28.04% are also above the industry average at 15.24%, not to mention above the rest of the industry's respective figures. The more important margin, net profit margin, is also in favor of 3M. The past fiscal year illustrated this figure at 18.61%. The number is quite high compared to the company's five year average at 14.70%. In addition, 3M's number beats the industry average of 11.81%, United Technologies' figure at 8.10%, Emerson's margin at 9.29%, and GE's number at 12.88%. 3M is working very efficiently compared to its industry peers. It can use the extra cents it makes for every dollar to help the company and investors. Capital spending over the past five years for 3M is growing at 3.57%. This number is higher than the industry average of 0.98% and higher than most of the aforementioned companies. Higher capital spending now means even more efficiency in the future for 3M. Lower costs mean wider margins and a greater ability for 3M to buy back shares from investors or increase its dividend.
While 3M's growth looks excellent, some investors may question the company's valuation. According to Reuters, the conglomerate industry has an earnings multiple of 19.92. Fortunately, for investors wanting to buy shares of this company, the forward P/E ratio for 3M is 18.99. This number is very similar to GE, Emerson, and United Technologies. In addition, 3M's forward price to sales ration of 2.82 is also similar to the mentioned companies. This indicator illustrates that not only is 3M growing quite strongly, but 3M is also undervalued compared to its growth across this industry. High growth and low valuation typically create a strong recipe for success. 3M's PEG ratio of 1.67 is near or below most of the industry competitors which again illustrates low valuation given growth.
In terms of other 3M strengths, this company is solvent with a 1.28 current ratio. The company is owned by more than 67% institutional investors. This indicates that the smartest investors like this company and want to take the risk to own it. The company's ROE of 39.97% is excellent. This number is above its five year average of 33.31% and also above the industry average of 20.97%. This number obliterates GE, United Technologies, and Emerson's figures. And if higher margins continue to be present for 3M, future buybacks will lead to even increased returns. 3M's ROA of 19.82% and ROI of 27.80% are also quite strong. 3M is also very efficient when it comes to turnover. Receiver turnover at 6.99 beats the industry average of 4.27 which means consumers pay their discounts or credit on average every 50 days. Asset turnover at 1.07 is also stronger than the industry average of 0.53, which means 3M's asset moves usually mean larger sales. Overall, there are plenty of advantages to owning 3M and its fundamentals.
Therefore, now would be an excellent time to think about purchasing 3M shares. The dividend yield for this company at 2.04% is very reasonable. In addition, technical indicators illustrate appreciating 50 day SMA and EMA indicators coupled with an up trending Parabolic SAR. The recent cross over of SMA and EMA a few weeks back indicates that 3M is ready to rise and should enjoy higher share price appreciation until the lines converge. Therefore, given the fundamental, technical, and strategy analysis, there are plenty of reasons for investors to purchase shares of 3M as a part of a diversified portfolio.
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
52.8%
EBIT Margin
23.0%
EBITDA Margin
27.2%
Pre-Tax Profit Margin
22.2%
Interest Coverage
28.9
Current Ratio
2.6
Quick Ratio
1.8
Leverage Ratio
1.9
Receivables Turnover
6.9
Inventory Turnover
4.2
Asset Turnover
0.9
Revenue to Assets
0.9
ROE from Total Operations
26.4%
Return on Invested Capital
19.9%
Return on Assets
13.6%
Debt/Common Equity Ratio
0.33
Price/Book Ratio (Price/Equity)
4.09
Book Value per Share
$21.69
Total Debt/ Equity
0.42
Long-Term Debt to Total Capital
0.25
SG&A as % of Revenue
20.3%
R&D as % of Revenue
5.3%
Receivables per Day Sales
$53.42
Days CGS in Inventory
86
Working Capital per Share
$12.10
Cash per Share
$6.25
Cash Flow per Share
$7.31
Free Cash Flow per Share
$3.09
Tangible Book Value per Share
$11.65
Price/Cash Flow Ratio
12.1
Price/Free Cash Flow Ratio
28.7
Price/Tangible Book Ratio
7.62
Most recent data
5-Year Averages
Return on Equity
32.8%
Return on Assets
14.9%
Return on Invested Capital
25.0%
Gross Profit Margin
53.1%
Pre-Tax Profit Margin
22.6%
Post-Tax Profit Margin
15.3%
Net Profit Margin (Total Operations)
15.3%
R&D as a % of Sales
5.8%
SG&A as a % of Sales
21.2%
Debt/Equity Ratio
0.31
Total Debt/Equity Ratio
0.43
Most recent data
With over 76,000 employees, they produce over 55,000 products, including: adhesives, abrasives, laminates, passive fire protection, dental products, electronic materials, medical products [6] electronic circuits and optical films.[7] 3M has operations in more than 60 countries – 29 international companies with manufacturing operations, and 35 with laboratories. 3M products are available for purchase through distributors and retailers in more than 200 countries, and many 3M products are available online directly from the company.
3M Co. sells a wide range of products to a diversified base of customers around the world and has no material concentration of credit risk. Revenue is recognized when the risks and rewards of ownership have substantively transferred to customers. This condition normally is met when the product has been delivered or upon performance of services. 3M Co. records estimated reductions to revenue or records expense for customer and distributor incentives, primarily comprised of rebates and free goods, at the time of the initial sale. These sales incentives are accounted for in accordance with ASC 605, Revenue Recognition. The estimated reductions of revenue for rebates are based on the sales terms, historical experience, trend analysis and projected market conditions in the various markets served. Since 3M Co. serves numerous markets, the rebate programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. Free goods are accounted for as an expense and recorded in cost of sales. Sales, use, value-added and other excise taxes are not recognized in revenue.
The majority of 3M’s sales agreements are for standard products and services with customer acceptance occurring upon delivery of the product or performance of the service. 3M also enters into agreements that contain multiple elements (such as equipment, installation and service) or non-standard terms and conditions. For multiple-element arrangements, 3M recognizes revenue for delivered elements when it has stand-alone value to the customer, the fair values of undelivered elements are known, customer acceptance of the delivered elements has occurred, and there are only customary refund or return rights related to the delivered elements. In addition to the preceding conditions, equipment revenue is not recorded until the installation has been completed if equipment acceptance is dependent upon installation, or if installation is essential to the functionality of the equipment. Installation revenues are not recorded until installation has been completed. For prepaid service contracts, sales revenue is recognized on a straight-line basis over the term of the contract, unless historical evidence indicates the costs are incurred on other than a straight-line basis. License fee revenue is recognized as earned, and no revenue is recognized until the inception of the license term. On occasion, agreements will contain milestones, or 3M will recognize revenue based on proportional performance. For these agreements, and depending on the specifics, 3M may recognize revenue upon completion of a substantive milestone, or in proportion to costs incurred to date compared with the estimate of total costs to be incurred.
roperty, plant and equipment, including capitalized interest and internal engineering costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-line method based on the estimated useful lives of the assets. The estimated useful lives of buildings and improvements primarily range from 10 to 40 years, with the majority in the range of 20 to 40 years. The estimated useful lives of machinery and equipment primarily range from three to 15 years, with the majority in the range of five to 10 years. Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.
3M is a diversified manufacturer with one of the highest international presences of any multi-industry company. With products such as Post-It Notes and Scotch Tape as well as high-tech LCD films, 3M develops innovative new products while turning a profit off of old favorites. 3M operates in six business segments: Healthcare, Industrial & Transportation, Consumer & Office, Display & Graphics (D&G), Electro & Communications, and Safety, Security & Protection. 2009 sales totaled $23.1 billion, down 8.5% from 2008, and 2009 net income was $3.31 billion compared to $3.65 billion for 2008.[1]
3M is becoming increasingly global: in 2009, 63% of 3M's total revenue came from outside the United States.[2] Its international penetration makes 3M well-positioned to take advantage of growing economies such as those of India and China, China, and Brazil. In the first quarter of 2010, overseas sales grew 47% year-over-year, while sales in United States were up by 11%.[3]
3M has stepped up acquisitions of smaller international companies to spur overseas and portfolio expansion. In April 2008, 3M acquired Aearo Holding Corp, a company that manufactures and sells personal protection and energy absorbing products. This added hearing, eye, and fall protection to 3M's offerings. [4] In September 2009, 3M CEO George Buckley said it will acquire "different businesses" over the next year to continue to augment its product offering, [5] and will spend $1 billion from Oct 2009 to Oct 2010 on acquisitions. [6] In September 2010, the company said it would be buying Cogent, a maker of finger, palm, face, and eye biometric devices.[7] The company is looking to buy products and brands that are well-known in their domestic markets in order to accelerate penetration of foreign markets. [6]
Business and Financial Metrics
3M's 2009 revenue totaled $23.1 billion, an decrease of 8.5% from the year before.[8] It's operating income and net income, however, experienced drops of 9.3% and 7.7%, respectively, from the year before.[9] The drop offs in operating and net income can primarily be attributed to restructuring actions, exit activities and a loss on sale of businesses.[10]
Business Segments
3M Company had a rocky start in 1902 as "Minnesota Mining and Manufacturing," an almost-failed mining company. In 2002 it changed its name to 3M; today the company is a diversified industrial and consumer products company operating six business segments. 3M sells the majority of its products to retailers or other large distributors; some large companies and hospitals have direct accounts with 3M for their more specialized technologies.
Best known for brands including Scotch tape, Post-It, and Nexcare, 3M makes over 55,000 products ranging from sandpaper and bandages to wide screen LCD TVs. The thread that unifies the majority of 3M’s products is that they are based on applying coatings to backings (e.g., sandpaper). Divisions with key product offerings are listed below:
Healthcare (18.6% of sales)[8]: Medical Supplies; Skin Products; Pharmaceuticals (sold in 2007); Drug Delivery Systems; Dental / Orthodontic; Health Information Systems; Microbiology
Industrial & Transportation (30.8% sales)[8]: Abrasive Systems; Industrial Adhesives; Personal Care; 3M Dyneon; CUNO; Specialty Materials; HighJump Software; Aerospace; Packaging; Automotive
Consumer & Office (15% of sales)[8]: Stationary; Office; Home Care; Protection; Construction; Home Improvement; Visual Systems
Display & Graphics(13.5% of sales)[8]: Optics Systems; Commercial Graphics, Traffic Safety Systems; Touch Systems
Electro & Communications (9.8% of sales)[8]: Electronics Solutions; Electric Markets; Communications Markets; Electronics Material Markets
Safety, Security & Protection (13.8% of sales)[8]: Industrial Minerals; Commercial Care; Security Systems; Building Safety; Corrosion Protection; Occupational health; Environmental Safety
Business Drivers
International v. Domestic Economies
Strength in growing markets overseas
While the North American economy could continue to remain sluggish, it appears that overseas industrial markets continue to shine. This should bode well for 3M, considering that more than 60% of 3M’s revenues are derived from outside of the U.S. Furthermore, should the dollar remain weak, 3M could continue to benefit from it and other exchange rates. Considering that 3M’s products are largely positioned as consumables (e.g., filters, Post-it notes), growing international demand for 3M products should directly correlate with rising disposable income in developing economies over time. To this end, 3M expects annual revenue growth rates of between 15 and 30 percent for China, Russia, India, the Middle East, and Eastern Europe.
This will become increasingly important for 3M's largest international market: Asia. China, Japan and India are three particular markets where 3M has significant opportunity to claim market share due to growing economies and large populations. To target these opportunities, 3M has dedicated $500 million of incremental spending to expand capacity in the next two years in high-margin businesses like Safety, Security & Protection. The company estimates that it could be capacity constrained for up to 20% of its current volumes. In 2006, 3M announced new capacity expansion plants in Poland and Korea. In addition to these two initiatives, 3M has also announced plans to aggressively expand in Asia with four plants currently under construction in China.
In January 2010, the company said it expects sales in Central and Eastern Europe to grow over 20% annually for the next five years, with Poland providing the bulk of its regional production. Poland was the only European Union member to survive the global economic downturn without entering a recession. [11]
Domestic slowdown
The American economy has recently felt the effects of a housing market bubble. Housing wealth is expected to decline in 2007, which could result in a decrease in U.S. consumer spending. An estimated 6% of 3M revenue is directly tied to North American consumer habits, especially for the Display & Graphics division, for which a third of sales are domestic and most LCD televisions are screens sold to end consumers. (See Home Entertainment Growth.) However, in the first quarter of 2010, LCD televisions shipments have rebounded and should benefit the division, according to Morgan Stanley. [12]
Downsizing Pharmaceuticals area
3M completed the sale of its pharmaceutical division in January 2007 to multiple buyers for a combined $2.1 billion. This sale will allow 3M to focus on core product areas while still maintaining manufacturing rights for its former pharmaceutical products, a term negotiated in the divestiture.
Its European branded pharmaceuticals business has been sold to Meda AB, a Sweden-based drug-marketing company. Asian operations went to Ironbridge Capital and Archer Capital, two Australian private equity firms. U.S., Canadian, and Latin American operations went to Graceway Pharmaceuticals Inc.
LCD films
3M's proprietary products work to make flat panel display screens brighter by refracting usable light towards the viewer and recycling unusable light back through the display without absorbing light waves. This product is used mainly in notebook PCs and hand-held devices and to a lesser extent in TVs and monitors to make electronic displays more vibrant and thereby allowing a reduction in energy usage for these products by 50-70%.[13]
Once the industry leader in this market, sales at 3M's Display and Graphics division dropped 6% during Q1 2008 and 16% during Q2 2008.[14] This massive fall-off was caused when a low-cost producer entered the optical films market and began selling a lower quality film for a fraction of the cost of 3M's films. As a result, producers of electronic displays found it more profitable to buy cheaper/lower-quality films and simply engineer other aspects of their displays to achieve the brightness and definition traditionally achieved by optical films. This market development has resulted in a 2/3 drop in sales for the Display and Graphics division.[15]
Growth through acquistions
Historically 3M has focused on organic growth, but recently it has become increasingly interested in acquisitions, especially in emerging markets. In October 2009, 3M CEO George Buckley said that the company intended to make 10-20 acquisitions in varying industries for a total cost of about $1 billion.[16]
One of the major expansion areas for 3M has been the market for LCD screens. The company dominates the global market for brightness enhancement films that are used by the flat panel display (FPD) industry for LCD applications in products such as LCD televisions, notebooks, desktop monitors, cell phones, and handhelds. The monitor market has historically been the largest piece of 3M’s LCD film sales. Its 2005 flat panel display film business breakdown was 60% monitors and TVs, 25% handhelds; and 15% notebooks.
Sensitivity to product cycles, seasonality
3M's fortunes in the flat panel display business are highly tied to the overall product lifecycle of these types of televisions and monitors. As the FPD business becomes more mature, prices decrease and margins are squeezed. 3M already saw decreases in its operating margins from 2005 to 2006, dropping from 33% to 28%.
On the upside, the 2006 holiday season created a major boost in LCD screen sales and consumers demanded larger TV and monitor screen sizes. 3M benefits from this trend because the company sells its films by surface area. Additionally, the 2008 Olympics in China could provide a significant boost for LCD television sales in China and elsewhere.
Increasing raw materials prices
Given the specialty chemical content that characterizes many of 3M’s products (i.e., adhesion and abrasion properties), raw materials and their associated prices can significantly influence the company’s margins. In addition to components and compounds, 3M consumes various energy products including natural gas. Over the past few months, the prices of key raw materials –-copper, natural gas, toluene, ethylene, ethane, benzene and polyethylene--have been on the rise trend, potentially hurting 3M's margins. Management expected the company's raw material costs to increase 3-4% for 2008.[17] These price increases affect 3M through greater manufacturing, energy, and transportation costs. Furthermore, while the weaker dollar is good for 3M's sales, it has also effectively increased the cost of raw materials imported from outside the U.S. As of mid-2008, management has successfully mitigated these effects by increasing the price of 3M products more than the cost increases for raw materials.
Environmental Lawsuits
3M has been subject to lawsuits within the United States for the operation of its chemical plants. In 2008-2009 Minnesota lawsuit, three households allege that 3M scientists knew 3M was producing harmful chemicals but failed to report it, causing house values to decline in the area. Attorneys for 3M said the chemicals were introduced when there were few pollution laws. 3M also has said the trace levels of chemicals in water aren't a health threat. [18]
Competition & Operational Metrics
Since 3M operates in six different business sectors, it faces various smaller, more specialized companies in singular areas and a few larger companies cross sector, such as Tyco International (TYC). Industry & Transportation, Healthcare, and Display & Graphics, are the three greatest contributors to sales for 3M, so operational metrics for these three sectors should be examined separately.
Since 2004, as 3M experienced increased competition in its Brightness Enhancement Films area, organic growth and margins for the segment have come under more pressure. Its Dual Brightness Enhancement Films technology faces less pressure from competitors, but operating margins may decrease as a result of pressure on LCD screen manufactures to cut costs as the LCD industry becomes highly competitive.
2008 Market Share in the Brightness Enhancement Film Market:
3M (80%)
Nitto-Denko (19%)
Mitsubishi Reyon(1%)
In 2009, the healthcare business proved to be the company's fastest growing business by sales, with revenue rising at 6%, twice the company average. 3M benefited in early 2009 from the avian flu epidemic, which boosted sales of N95 face masks and other hygenic products.[19] In this space, 3M competes with firms such as Procter & Gamble Company (PG), Kimberly-Clark (KMB), and Clorox Company (CLX).
Before examining the financial statements of 3M, it is vital to understand the variety of activities this company performs. According to Reuters, 3M is a "diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications." The industrial and transportation business includes products such as food and beverage, personal care, and automobiles. More specific industrial products include polyester, foil, and tape. Specific transportation products are insulation components like catalytic converters. The health care segment produces supplies for medical, surgical, and dental use. The display and office business employs workers to produce stationary products, supply products, and home-improvement products. Office products like Post-it Memo Pads are also produced in this section. 3M also controls a safety segment and an electro and communications section, where the latter creates products including telecommunication fiber-optic products.
The main idea to take from the different business of 3M is the hedging strategy. Instead of focusing on only one industry, 3M can have a section of its business prosper, while another section's growth slows. It is true that 3M may not experience any incredible share price appreciation because of its strategy, but 3M will not experience any dramatic share price fallout either. As evidence, since 1999, 3M has only had one distinct negative share price calendar year (2005), and that year only yielded a loss of 6%. Each year during this timeline before and after 2005, 3M has been flat or shown share price appreciation. In 2006 the share price rose about 5%, and so far in 2007 the share price is up over 30%. Throughout this period, the US economy has been through exuberant growth to panicked recession. However, because of 3M's strategy and investor's trust in such a well-respected brand, 3M has managed to avoid so terrible economic periods.
While, 3M's business model is great, there are many other corporations in this industry that have similar strategies. What differentiates 3M however is its fundamentals. Over the last fiscal year, according to Reuters, 3M saw revenue at $22.9 billion dollars. This is an outstanding number. What is more outstanding is relative sales growth. 3M's recent sales figure was 7.86% higher than it was the previous fiscal year. Not only is this increase higher than its five year average, but it is also higher than the five year average of the conglomerate industry. Considering the size of sales volume, this is a great sign of growth. What is even more outstanding is earnings growth. 3M has been efficient with its costs and saw an increase in profits of over 32.76% last fiscal year. This number is higher than the company's five year average at 23.13% and also higher than the industry's average at 13.87%. Comparing this figure to industry competitors, United Technologies only saw a 13.72% increase during the same time period, Emerson Electric saw a 20.26% increase, and GE only had profits grow by 12.16%. Clearly 3M is growing and using good internal controls to reduce cost.
Another way of illustrating 3M's strong growth is through its margins. Gross margins for 3M at 47.94% are quite high compared to the industry's average at 39.01%. 3M's gross margins are also higher than United Technologies' 26.78% figure, Emerson's 35.70% number, and GE's 42.83% margin. In addition, 3M's operating margins at 28.04% are also above the industry average at 15.24%, not to mention above the rest of the industry's respective figures. The more important margin, net profit margin, is also in favor of 3M. The past fiscal year illustrated this figure at 18.61%. The number is quite high compared to the company's five year average at 14.70%. In addition, 3M's number beats the industry average of 11.81%, United Technologies' figure at 8.10%, Emerson's margin at 9.29%, and GE's number at 12.88%. 3M is working very efficiently compared to its industry peers. It can use the extra cents it makes for every dollar to help the company and investors. Capital spending over the past five years for 3M is growing at 3.57%. This number is higher than the industry average of 0.98% and higher than most of the aforementioned companies. Higher capital spending now means even more efficiency in the future for 3M. Lower costs mean wider margins and a greater ability for 3M to buy back shares from investors or increase its dividend.
While 3M's growth looks excellent, some investors may question the company's valuation. According to Reuters, the conglomerate industry has an earnings multiple of 19.92. Fortunately, for investors wanting to buy shares of this company, the forward P/E ratio for 3M is 18.99. This number is very similar to GE, Emerson, and United Technologies. In addition, 3M's forward price to sales ration of 2.82 is also similar to the mentioned companies. This indicator illustrates that not only is 3M growing quite strongly, but 3M is also undervalued compared to its growth across this industry. High growth and low valuation typically create a strong recipe for success. 3M's PEG ratio of 1.67 is near or below most of the industry competitors which again illustrates low valuation given growth.
In terms of other 3M strengths, this company is solvent with a 1.28 current ratio. The company is owned by more than 67% institutional investors. This indicates that the smartest investors like this company and want to take the risk to own it. The company's ROE of 39.97% is excellent. This number is above its five year average of 33.31% and also above the industry average of 20.97%. This number obliterates GE, United Technologies, and Emerson's figures. And if higher margins continue to be present for 3M, future buybacks will lead to even increased returns. 3M's ROA of 19.82% and ROI of 27.80% are also quite strong. 3M is also very efficient when it comes to turnover. Receiver turnover at 6.99 beats the industry average of 4.27 which means consumers pay their discounts or credit on average every 50 days. Asset turnover at 1.07 is also stronger than the industry average of 0.53, which means 3M's asset moves usually mean larger sales. Overall, there are plenty of advantages to owning 3M and its fundamentals.
Therefore, now would be an excellent time to think about purchasing 3M shares. The dividend yield for this company at 2.04% is very reasonable. In addition, technical indicators illustrate appreciating 50 day SMA and EMA indicators coupled with an up trending Parabolic SAR. The recent cross over of SMA and EMA a few weeks back indicates that 3M is ready to rise and should enjoy higher share price appreciation until the lines converge. Therefore, given the fundamental, technical, and strategy analysis, there are plenty of reasons for investors to purchase shares of 3M as a part of a diversified portfolio.
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
52.8%
EBIT Margin
23.0%
EBITDA Margin
27.2%
Pre-Tax Profit Margin
22.2%
Interest Coverage
28.9
Current Ratio
2.6
Quick Ratio
1.8
Leverage Ratio
1.9
Receivables Turnover
6.9
Inventory Turnover
4.2
Asset Turnover
0.9
Revenue to Assets
0.9
ROE from Total Operations
26.4%
Return on Invested Capital
19.9%
Return on Assets
13.6%
Debt/Common Equity Ratio
0.33
Price/Book Ratio (Price/Equity)
4.09
Book Value per Share
$21.69
Total Debt/ Equity
0.42
Long-Term Debt to Total Capital
0.25
SG&A as % of Revenue
20.3%
R&D as % of Revenue
5.3%
Receivables per Day Sales
$53.42
Days CGS in Inventory
86
Working Capital per Share
$12.10
Cash per Share
$6.25
Cash Flow per Share
$7.31
Free Cash Flow per Share
$3.09
Tangible Book Value per Share
$11.65
Price/Cash Flow Ratio
12.1
Price/Free Cash Flow Ratio
28.7
Price/Tangible Book Ratio
7.62
Most recent data
5-Year Averages
Return on Equity
32.8%
Return on Assets
14.9%
Return on Invested Capital
25.0%
Gross Profit Margin
53.1%
Pre-Tax Profit Margin
22.6%
Post-Tax Profit Margin
15.3%
Net Profit Margin (Total Operations)
15.3%
R&D as a % of Sales
5.8%
SG&A as a % of Sales
21.2%
Debt/Equity Ratio
0.31
Total Debt/Equity Ratio
0.43
Most recent data