3M’s Innovation And Emerging Markets Focus Underpin Its Growth

by Trefis Team
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    Executive Summary
     

  • The company targets annual growth of 4-6% in sales and 9-11% in earnings over the next five years, and we believe the continued focus on research and development and growing presence in emerging markets will be crucial for the company in achieving these targets.
  • The company posted 6% CAGR in sales and 11% CAGR in profits over the past decade leveraging its wide product portfolio.
  • 3M plans to return more cash to shareholders over the next five years, vs. the past five years, through higher dividend payouts and share buybacks.

A broad product portfolio and focus on innovation has helped 3M (NYSE:MMM) post a compounded annual growth rate (CAGR) of 6% in sales and 11% in earnings over the past decade. [1] The company operates in five major business segments – Industrial, Healthcare, Consumer, Safety and Graphics, and Electronics – which helps it extract growth at every stage of a country’s development. Thanks to its diversified businesses, 3M has seen growth in sales and profits across geographies.

3M’s industrial segment serves many underdeveloped and developing countries where building infrastructure and manufacturing is a top priority. In comparison, developed countries have more mature consumer markets and higher per capita incomes, and 3M serves these regions through its consumer, electronics and healthcare segments. These trends are also reflective in the company’s results as sales from developing regions in Asia and Central & Eastern Europe have a greater proportion of industrial products while sales from developed regions like North America and Western Europe have a better balance between industrial and consumer-healthcare products.

Leveraging the benefits of a broad product portfolio, 3M is targeting annual growth of 4-6% sales and 9-11% in earnings over the next five years. [1] We believe the company can achieve this if it maintains focus on product innovation and widens its presence in developing markets.

We currently have a stock price estimate of $110 for 3M, approximately 5% above its current market price.

See our complete analysis of 3M here

Ongoing emphasis on product innovation will maintain premium returns

In 2012, roughly 30% of 3M’s revenues were generated from products that were launched in the past five years. [1] These newer products have higher margins compared to older products which typically face pricing pressures due to competition catching on. Thus, the ongoing focus on research and development (R&D) is essential for the company to maintain the proportion of new product sales that bring in premium returns.

3M fully realizes the importance of R&D to its business and plans to increase the expenditure under this head going forward. In 2012, the company spent 5.5% of its revenue on R&D, up from 5.3% in 2011. [2] By 2017, it expects R&D expenses to constitute 6% of its revenue. Accordingly, in 2017, the company sees roughly 40% of its revenue coming from new products (products launched between 2012 and 2017). [1]

Increasing presence in developing markets will drive growth in sales and profits

Another factor essential for 3M’s sales and profit growth is its increasing focus on developing markets as these markets present better growth opportunities compared to developed markets. Currently, a majority of 3M’s revenues come from developed markets. In 2012, roughly 66% of 3M’s revenues were generated from developed markets including the U.S., and the remaining 34% came from developing markets. [1]

We believe the company’s ongoing measures like establishing research centers and manufacturing facilities in developing countries will boost revenues from these regions in the long term. Localized research centers and manufacturing plants will propel the development and launch of market specific products which will help expand 3M’s market presence. This will help it extract a larger portion of the overall growth in the developing markets.

3M anticipates that over the next five years its sales from developing markets will grow at rates between 8-12% per year compared to 2-4% annual growth anticipated from developed markets. Based on these growth rates, the company anticipates roughly 40-45% of its global sales to come from developing markets in 2017. [1]

Acquisitions will complement organic growth

The company also plans to invest $1-2 billion per year in acquisitions to complement organic growth. Last year it acquired three companies – FS Tech, an electronic tolling company; Code Ryte, a natural language processing software company in the healthcare sector; and Ceradyne Inc., an advanced technical ceramics company.

Returning cash to shareholders via dividends and stock repurchases could increase in the future

In all, we believe if 3M maintains its focus on innovation and increases its footprint in developing markets, it can achieve its sales and profit growth targets. At the same time, it will likely return more cash to shareholders over the coming years through higher dividends and stock repurchases. In 2013, 3M anticipates to pay a dividend of $2.54 per share, up from $2.36 per share in 2012, and thereafter it plans to raise dividend payouts in line with earnings growth. [1]

The company will also repurchase stock worth $7.5-15 billion over 2013-17 compared to stock repurchases worth $7 billion during 2008-12. [1]

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Notes:
  1. 3M’s presentation at Bank of America Merrill Lynch Global Industrial & EU Autos Conference, March 21 2013, www.3m.com [] [] [] [] [] [] [] []
  2. 3M’s 2012 10-K, February 14 2013, www.3m.com []
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