Sales Growth From Emerging Markets Will Drive 3M’s Fourth Quarter Results

3M (NYSE:MMM) is set to release its fourth quarter earnings on January 30, 2014. The diversified industrial company is expected to post moderate growth in sales and earnings, driven by growth from emerging markets like Latin America and Asia Pacific regions. The economic recovery in developed markets like U.S. and Europe will also aid growth.

In the previous quarter, 3M’s sales grew 6% year on year, driven by the recovery in the electronics markets and improved sales in Europe, the Middle-East and Africa (EMEA). Its net profits grew 8% annually to $1.78 per share, with margins remaining above 20%. ^[1]

During its third quarter earnings call, 3M narrowed its guidance for full year of 2013 citing the business was performing as per expectations. The company forecast 3-4% annual growth in its 2013 organic sales, compared to 2-5% growth guided earlier. This excludes the impact from currency fluctuations and acquisitions. Also, 3M narrowed its 2013 earnings expectations to around $6.65-6.75 per share, from $6.60-6.85 per share guided earlier. ^[2] The new earnings forecast represents annual growth of 5-7%, well below the company’s guidance of 9-11% over the 2013-17 period. ^[3] 3M believes that it is capable of achieving the guided earnings growth over the coming years; however, this will be difficult to achieve in the current year due to heavy investments in Enterprise Resource Planning (ERP).

We currently have a stock price estimate of $129 for 3M, almost in line with its current market price.

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Growing emerging markets will bolster 3M’s growth

In spite of weakness in the global economy, emerging markets like Latin America, Canada and Asia Pacific have continued to grow at relatively higher rates, allowing 3M to grow its sales from these regions at strong rates. Together, these markets constitute over 40% of 3M’s total sales. ^[4] We anticipate the sales growth from these regions to drive growth in 3M’s fourth quarter results.

In the third quarter of 2013, 3M’s organic local-currency sales from Latin America/Canada and Asia Pacific grew by 11% and 7% annually, with positive sales growth across segments — industrial, safety & graphics, electronics & energy, healthcare and consumer. ^[2] Overall, sales from emerging markets grew 10%, led by double digit growth in Safety & Graphics, Health Care and Consumer. For the full year 2013, 3M expects sales from emerging markets to grow by 5%-10% annually in local currency terms. ^[5]

Rising income levels have encouraged consumers in emerging markets to focus on improving living standards. This has been driving strong growth in 3M’s healthcare products like medical and surgical supplies, skin infection prevention products, dental products and health information systems. Sales of 3M’s consumer products, which include Scotch-tapes and Post-it notes, are also rising from the emerging regions as a result of these trends. Additionally, higher infrastructure spending from these emerging regions is also increasing demand for 3M’s industrial products, which include structural adhesives, tapes, industrial abrasives, auto care kits and filtration systems.

Recovery In Developed Regions Will Aide Growth

We also anticipate 3M’s fourth quarter sales growth from the developing regions to be aided by moderate growth from the United States and Europe. Sales from Europe were weak throughout the first half of the year. However, there was some recovery in the growth rates in the third quarter where EMEA posted above 3% growth in sales. ^[2] As the Eurozone economy makes a weak recovery, we can expect to see continued moderate growth in sales from EMEA. Additionally, the U.S. economy has been performing well and the industrial sector of the country has continued to grow with strong consumer demand.

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1. 3M’s 2013 Q3 earnings form 8-K, October 24 2013, www.3m.com [↩]
2. 3M’s 2013 Q3 earnings presentation, October 24 2013, www.3m.com [↩] [↩] [↩]
3. 3M at Jefferies Global Industrials Conference, August 14 2013, www.3m.com [↩]
4. 3M’s 2012 10-K, February 14 2013, www.3m.com [↩]
5. 3M’s 2013 Outlook Presentation, December 12 2013, www.3m.com [↩]