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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 And Dental Products Market Share: In order to strengthen its position in the healthcare IT market, 3M acquired Treo Solutions, a healthcare data analytics and business intelligence provider, in April 2014. Information technology and analytics are increasingly being used in the healthcare sector, which is encouraging hospitals to invest considerable resources. Should this trend continue, 3M's leading position in the 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% to our current 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 over 30% of 3M's value, while the Medical Supplies and Dental products division contributes over 20%. The following factors are also helping to drive the company's 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.
Declining energy costs
Costs of energy such as oil and natural gas, required for manufacturing various products has been declining. This should help reduce 3M's operating expense and boost margins. Coupled with continuous pricing increases, this should have a positive impact on the company's bottom line.
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.
Strong U.S. dollar presents headwinds
3M operates all over the globe which means that it has to deal in a number of currencies. Due to the significant strength of the U.S. dollar, FX has tempered its earnings of late.
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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