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Investment Overview for 3M (NYSE:MMM)
Below are some key drivers of 3M's value which might present opportunities for upside or downside to the current Trefis price estimate for 3M:
- 3M's Medical Devices Market Share: Through a recent acquisition 3M entered the patient warming market, which aims to prevent hypothermia and infections in surgical settings. Anesthetized patients are less able to control their body temperature and therefore can be vulnerable to unplanned hypothermia. These complications can raise mortality rates and lengthen hospital stays and as such hospitals have begun to emphasize patient warming systems. Should this trend continue, 3M's leading position in this market could lead to an increase in its Medical Devices Market Share, from our estimate of about 1.7% to over 2.1% by the end of our forecast period. This would lead to a potential upside of about 4.2% to our current price estimate.
- Global Specialty Chemicals Market Size: The specialty chemicals market, in which 3M's Industrial Adhesive and Chemicals division competes, generally mirrors the global economy as industrial demand is largely driven by economic conditions. As global economic conditions continue to improve, we believe 3M's business is bound to grow. However, 3M's business could be significantly affected if the global economy and particularly US economy (which accounts for one-third of the company's sales) worsen. In such a scenario, growth in the specialty chemicals market could slow down reaching $500 billion compared to our current estimate of $676 billion. This would provide a potential downside of around 7% to the Trefis price estimate.
3M is a diversified industrial conglomerate which manufactures over 55,000 products available for sale in over 200 countries. The company's major products include adhesives, laminates, fire protection products, medical and surgical supplies, dental products, office supplies, optical film and car care products. Some of the company's most recognizable brands include Scotch Tape products, Post-It notes, ACE bandages and Thinsulate insulation products.
3M is widely considered one of the most innovative companies in the world. 33% of the company's sales come from products which had been launched in the prior five years. The company's facilities are spread across 38 countries, and it employs over 80,000 people, including about 7000 researchers. The company has benefited from its global footprint, with about two-thirds of its sales coming from international markets as of 2013.
We estimate that the Industrial Adhesives and Chemicals business constitutes about 31.5% of 3M's value, while the Medical Supplies and Dental products division contributes over 25%.
We believe that Industrial Adhesives and Chemicals business division and margins in the business divisions of Medical Supplies and Dental products and Safety and Display are the most important sources of value
Consistent innovation and aggressive acquisitions drive Industrial market share
3M has consistently made acquisitions in order to bolster its market share or diversify into new product lines. While we have not factored any acquisitions into our models we expect the company to remain acquisitive in order to foster growth and innovation. Additionally, the company's heavy R&D focus has resulted in innovative and unique products. We expect that the company's focus on high-growth areas like renewable energy and bioplastics will allow the company to maintain its market share in the face of increasing international competition.
Maintaining high margins in the Healthcare segment is paramount
3M's Healthcare margins typically range around 35-40%, while those for other divisions are mostly around 25-30%. This is what allows the Healthcare business to contribute such a meaningful percentage of 3M's value. Margins in this business are so high because of the uniqueness of 3M's products and patent protection. Accordingly, the company must continue to be innovative in producing new (patent-protected) products and in protecting its existing patent portfolio.
Growth in emerging markets
Emerging economies such as India and China will drive significant growth in many of 3M's markets in the near term. As the middle class grows in these countries and disposable income increases, we expect substantial growth in demand for consumer goods and household products while rapid industrialization will drive growth in demand for office supplies and specialty chemicals. Lastly, with more readily available healthcare we expect the medical device markets in these countries to grow rapidly.
Rising cost of raw materials
The increase in prices of many of the company's key commodities (oil, metals, etc) will result in higher manufacturing costs. While this will likely be partially offset by higher price points, it will still eat into the margins of manufacturing companies.
Shorter product life cycles
Given some of the rapidly advancing markets in which the company competes (particularly technology and healthcare) product life cycles are shortening by the day. While this will benefit innovative companies like 3M, it will also likely increase R&D requirements.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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