Summary
- 3M is an old-line global conglomerate seeking to leverage its financial strength and its technological leadership to move off an earnings plateau to a new era of growth.
- 3M has an A+ credit rating, 63 consecutive years of dividend increases, and a global footprint in several sub-sectors of industrial expansion.
- 3M’s four business segments are Safety & Industrial, Transportation & Electronics, Healthcare and Consumer.
- The company seeks to lead in environmental sustainability and corporate governance even as it deals with numerous liability lawsuits.
3M Company (MMM) is a global conglomerate, selling 60,000 products to a variety of customers and end markets. Almost 50% of company revenue comes from outside the Americas. The company has an A+ Standard & Poor’s credit rating, has paid uninterrupted dividends for over 100 years, and has raised the dividend for 63 consecutive years.
3M’s 2020 Annual Report indicated sales of $32.2 billion, essentially flat from 2019 and down slightly from 2018. MMM operates four business segments:
- Safety and Industrial (respiratory, hearing, eye protection, structural adhesives, industrial metalwork abrasives, autobody repair, closure and packaging systems, electrical products for construction, maintenance, power distribution, electrical equipment for OEMs), roofing;
- Transportation and Electronics (light management, electronic assembly, tapes and films, sound and temperature management for vehicles, packaging and interconnection solutions, reflective signage for highway and construction safety, large graphic films for ads and fleet signage, advanced ceramic solutions;
- Healthcare (skin, wound care, infection prevention, dentistry and orthodontia solutions, health care procedure coding and reimbursement software, filtration and purification systems, food safety indicator solutions;
- Consumer (abrasives, paint accessories, car care, DIY products, picture hanging and air quality solutions, stationery products, cleaning products for home, consumer bandages, braces, supports and consumer respirators.
Here’s a breakdown of 2020 revenue by business groups:
Strengths
3M is innovative and benefits from inter-company collaboration from its many scientists. The company continues to secure patents for new products.
3M’s strengths include its balance sheet. Q1 free cash flow was $1.4 billion and capital expenditures were $310 million. 3M expects full year 2021 capex to range from $1.8 to $2.0 billion. In Q1, 3M returned $1.1 billion via $858 million in dividends and $231 million in share repurchases.
3M ended 3/31/21 with $13 billion in net debt, a reduction of almost $5 billion from 3/31/20. The net debt to EBITDA ratio on 3/31/21 was 1.4, down from 2.2 on 3/31/20. The company intends to maintain this ratio around 1.4, which it believes gives it the flexibility to reduce or increase debt as opportunities are available.
In the Q1 earnings call, CFO Monish Patolawala identified 3M’s strengths as “broad based growth, strong operational execution and robust cash flows. We are prioritizing capital to our greatest opportunities for growth, productivity and sustainability….”
3M’s shareholder-friendly balanced capital allocation plan prioritizes growth:
Weaknesses
It is difficult to manage and to interpret to investors a conglomerate that sells over 60,000 products to a variety of customers. The company has a rich history of innovation. A few years ago, 3M secured several thousand patents annually. In 2020, 3M ranked 71st with 668 new patents.
Has the speed of technological change and the proliferation of competitors eroded 3M’s innovative dominance? The graph below raises an obvious question: Why did the price plummet in 2018? China-US trade was hampered by geopolitics and tariffs. In February 2018, 3M settled a Minnesota lawsuit over water pollution for $850 million. The PFAS and US Army earplug litigations were in the news. In 2018, 3M was hurt by exposure to the energy sector. And, the company has experienced significant cultural changes. Mike Roman became CEO in 2018. One of his four priorities was to focus on 3M’s culture. This shifting culture has been a weakness.
Opportunities
A strong research and development laboratory gives 3M a competitive advantage across multiple product categories. The company continues to pursue four priorities for the future set by CEO Mike Roman in 2018:
- Maximizing the power of 3M’s portfolio;
- Innovation;
- Transformation; and
- People and Culture.
3M is working hard to be a leader in ESG (lawsuits notwithstanding) “with significant new commitments that will bend the curve on carbon emissions, water use, and improving water quality.” The Q1 earnings call included a report from John Banovetz, Chief Technology Officer and EVP for Environmental Responsibility. 3M has committed $1 billion over the next 20 years to focus on air, water and waste efficiency. Specifically, 3M “plans to reduce water use at our facilities by 25% over the next decade.” Company headquarters is fully powered by renewable electricity. 3M’s global electricity use is now 40% renewable, “on our way to 100%.”
3M has an opportunity to grow its automotive profitability, particularly through its presence in electric vehicles.
Threats
Watch 3M’s liability exposure to product liability and environmental lawsuits from operations such as its manufacture of PFAS (per- and polyfluoroalkyl chemicals) and US Army earplugs. S&P downgraded MMM from AA- to A+ in part because of potential legal liability. 3M deals with manufacturing regulations from multiple jurisdictions and the threat of rising tariffs springing from geopolitical disagreements.
3M faces stiff competition from lower cost competitors and from competitors in state-supported economies such as China.
F.A.S.T. Graphs
While the graph’s black price line is the attention-getter, the EPS data is more significant. 3M has been unable to sustain significant earnings growth for the past seven years. Investors should watch for revenue and earnings growth.
Long-term Business Outlook
The businesses briefly described at the beginning of the article encompass several areas of potential continued growth in the years ahead. Global infrastructure is beginning what may be a major period of building (or rebuilding), EV technology is moving the automotive business forward, and the pandemic has focused global leaders of government and industry on the importance of improving the world’s health and health care.
Disclosure: I am/we are long MMM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for individual selection. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
