Here Is Why We Think 3M Is Worth $140

by Trefis Team
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Trefis
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3M (NYSE:MMM) is set on a growth path driven by a global economic recovery and strong growth rates in the end markets that it serves. 3M offers a wide variety of products that cater to every phase of a country’s economic evolution. Hence, its growth is highly correlated with economic growth of the market. It recently reported a 3.2% growth in revenue for the full year 2013. With global markets showing a strong recovery since the slowdown in 2009, 3M is poised to grow over the coming years. Keeping this in mind, we have revised our price estimate for 3M to $140.49.

See our complete analysis of 3M here.

3M Will Benefit From Growth In World Output

Since 3M’s growth is highly correlated to economic growth of a country, growth in world output is a good indicator for 3M’s global growth prospects. In 2013, the world output grew 3% with developed economies growing 1.3%. [1] Though these growth rates have slowed down by 0.1% since 2012, the International Monetary Fund (IMF) has a positive outlook for the coming years driven by an increase in global activity and word trade in the second half of 2013 as well as a recovery in developed economies. The IMF forecasts world output to grow 3.7% in 2014 and 3.9% in 2015. Developed economies, which accounted for 65% of 3M’s revenues in 2013, are expected to grow 2.2 % in 2014 and 2.3% in 2015.

3M is focused on expanding its presence in developing economies to capitalize on their high growth rates. The IMF forecasts developing economies to grow 5.1% in 2014 and 5.4% in 2015. [1] 3M expects developing economies, including India, China, and Latin America, to contribute around 40%-45% of the overall revenues by 2017, up from 35% in 2013.

Strong Growth in End markets will bolster 3M’s revenues

3M offers products that cater to a wide variety of end markets such as automotive, telecommunications, construction, manufacturing, traffic safety, electronics, energy, health care, home improvement, office supplies and household products. Growth across these end markets will drive revenue growth for 3M.

Automobile: The US automotive industry has seen strong growth in 2013. Vehicle sales grew 8% to reach 15.6 million units. [2] The average age for vehicles has also gone up. [3] Both these trends support growth in sales of equipment and materials that support upkeep of vehicles so that they are in good running condition. Demand for emissions filters will also increase in the coming years due to more stringent emission standards being implemented across the globe to curb vehicular emissions.  For example, the U.S. will be implementing its Tier 3 emission standards starting 2017. [4] China is also set to launch its Phase 5 standards nationwide by January 2018. [5] India is currently in the process of implementing its Bharat Stage 4 standards which will be in effect by 2015. [6]

3M’s automotive and aftermarket products, which account for more than 9% of its overall sales and 28% of industrials segment sales, are set to benefit from these trends. 3M offers products such as paints, waxes, adhesives, sealants, functional and decorative graphics, interior panels, carpets and emissions filters as part of it automotive and aftermarket products portfolio.

Construction: The U.S. housing market also saw strong growth in 2013 with a record number of housing starts in November 2013. [7] Permits for future projects were also high, indicating high demand moving into 2014. Housing starts declined in December 2013 and January 2014 due to bad weather conditions; however the outlook is still promising.

3M offers a wide variety of construction related products such as films that enable better insulation, lighting equipment, tapes and adhesives, roofing material and air filters.

Healthcare: Health care requirements are growing driven by a growth in aging population, public health insurance initiatives by governments and a move towards improving living standards. Most of the growth in the healthcare sector is expected to come from developing countries. This is because of the emergence of a strong middle class with increasing disposable incomes. In addition, as developing countries become stronger in terms of manufacturing and infrastructural capabilities, their focus will shift towards improving their living standards.  This will drive growth in 3M’s healthcare segment. 3M offers bandages, medical tapes, stethoscopes, garments such as surgical drapes and masks, drug delivery systems such as inhalers and patches, dental and orthodontic products such as tooth whiteners, sealants, impression materials and crowns. The healthcare segment accounts for around 17% of 3M’s overall revenues and is expected to grow 3%-6% in 2014. [8]

Telecommunications: Extensive video and voice communication over the Internet is driving demand for higher speeds and bandwidth. Consumers frequently use the internet for viewing online video content such news and movies, and making video and voice calls since it is cheaper and more convenient. Combined with the vast penetration of internet enabled mobile phones, the amount of data transferred across the internet is expected to grow. Service providers have to strengthen their infrastructure to manage heavy data traffic. In order to strengthen their existing networks or build new ones, service providers have to use optical or copper-based wiring and related hardware. 3M offers products such as optical and copper cables, splicing and connecting equipment, splitters and enclosures that can cater to the telecommunications industry.

Electronics: Growth in consumer electronics such as TVs, mobiles, notebooks and tablets will also help growth in 3M’s revenues. 3M offers films that enhance colors and brighten displays of consumer electronics. It recently launched a privacy filter for computer and mobile screens that prohibits viewing the display from side angles.

There has been rapid growth in the number of touch-based devices such as smartphones and tablets. Even notebooks and PC monitors are gradually moving to touch-based screens. 3M manufactures touch screens, monitors and touch sensor components to cater to the growing requirement of touch-based systems. 3M’s electronics and energy segment accounts for around 17% of the overall revenues and is expected to grow by 2-5% in 2014. [9]

The above trends present a strong growth opportunity for 3M in 2014, and we believe 3M is well-positioned to capitalize on this opportunity considering its vast product portfolio and a global presence.

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Notes:
  1. World Economic Outlook, January 21 2014, www.imf.org [] []
  2. Strong U.S. Auto Sales for 2013, January 6 2014, www.zacks.com []
  3. Average U.S. car is 11.4 years old a record high, August 6 2013, money.cnn.com []
  4. US: Emissions, www.transportpolicy.net []
  5. China: Emissions, www.transportpolicy.net []
  6. India: Emissions, www.transportpolicy.net []
  7. U.S. Housing Starts Jump to Highest Level in Five Years, December 19 2013, www.bloomberg.com []
  8. 3M’s CEO Hosts 2014 Outlook Meeting Conference, December 18 2013, www.seekingalpha.com []
  9. 3M’s CEO Hosts 2014 Outlook Meeting Conference, December 18 2013, www.seekingalpha.com []
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