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Investment Overview for 3M (NYSE:MMM)
Acquisitions and Divestitures
3M has been active in terms of portfolio adjustments in the third quarter. In September, 3M acquired Semfinder, a Switzerland-based medical coding technology company, which is a leading developer of precise semantic coding of medical services. This acquisition will enable 3M to accelerate the availability of its 3M 360 Encompass System in countries adopting electronic medical records, and hence, accelerate penetration into international markets. The company also announced its agreement with Verily Life Sciences (formerly Google Life Sciences), an Alphabet company, to develop new population health measurement technology for managing clinical and financial performance. The joint technology platform, between 3M and Verily, will be used to analyze population-level data sets, with the aim of aiding hospitals to get meaningful information, which can be used to improve healthcare quality, while at the same time reduce costs. These two partnerships reflect the company's focus on the Health Care segment to drive growth for it in the future. Besides these, 3M also finalized the sale of a non-core protective films business, in order to further enhance and focus on its Industrial portfolio. On December 8, 3M announced its decision to sell its identity management business, within the Traffic Safety and Security Division, to Gemalto, the world leader in digital security, for $850 million. In another deal, announced on December 6, 3M entered into an agreement to divest its safety prescription eyewear business to HOYA Vision Care. This business is a part of 3M's Personal Safety division, which is in the Safety & Graphics business.
Restructuring Plan to Strengthen Competitiveness
In 2012, 3M began its process of restructuring. Since then the company has realigned from 6 sectors to 5 business groups, and from 40 businesses to 26. In 2015, the dental and orthodontic businesses were combined with the Health Care business group. This has been done to deliver greater benefits, particularly to customers, by way of greater customer relevance, scale, productivity, and speed. It has also made resource allocation more efficient, for purposes of organic growth, as well as through acquisitions. A corporate restructuring plan, announced with the Q3 earnings, which was completed by the end of 2015, will result in a pre-tax charge of $100 million, or ~$0.14 per share. This involved plans to reduce structural overheads in the United States and other slow growing markets such as Europe, Middle East-Africa, and Latin America, by eliminating 1,500 jobs, or 1.7% of the company’s total. This action would produce pre-tax savings of $130 million in 2016. 3M is also moving towards a more efficient business model and is rolling out a global ERP system. This will help the company to optimize the delivery of transactional services, resulting in lower costs and greater value creation. According to Inge Thulin, 3M Chairman, President and CEO, annual operational savings of $500-$700 million are expected by 2020, along with another half-a-billion in the annual reduction of working capital.
Focus on R&D to drive Organic Growth
Research and development is at the core of the company, aiding the company in maintaining higher margins and greater returns on invested capital. Going forward, 3M intends to invest $1.8 billion in R&D, or about 5.8% of the total sales. Rapid population growth in urban areas is driving a need for greater energy efficiency, clean water, and environmental protection. Consequently, as mentioned in the 2016 outlook presentation, 3M is building an ‘Urban Solutions’ lab in Singapore to develop relevant solutions. However, the R&D expenditure fell 2.8% to $421 million in FY 2016. The company had earlier stated its intentions of spending $1.8 billion in FY 2016 on R&D; however, it failed to reach that level of spending, with $1.74 billion expended in the year. R&D is at the core of the company, and is the reason why the company is where it is today. With a decline in the spending, the company will not be able to achieve significant top line growth..
Q4 & FY 2016 Earnings
3M reported its fourth quarter and full year earnings on January 24, 2017. While the revenue was in line with consensus, the company managed to beat the EPS by a penny. 3M also reaffirmed its outlook for 2017, of earnings expected to be in the range of $8.45 to $8.80 per share, with organic local-currency sales growth of 1% to 3%. Organic growth in the Industrial segment turned positive in the quarter, and was a key driver in the growth of the company. A strong 5% organic growth was reported, which was broad-based across the portfolio. 2% organic growth in the Safety & Graphics segment was reported as a result of a good performance in personal safety and roofing granules businesses. A 1.3% rate was seen in the Health Care business, at a similar level to the third quarter. A return of the momentum in this business is expected as the company moves forward in 2017. Organic growth at Consumer was down 1%, as it was negatively impacted by inventory reductions throughout the retail industry. The company's Electronics & Energy segment closed out the year with another quarter of sequential improvement, posting organic growth that was down marginally, while again expanding its margins. Focusing on margins across the company, the company delivered a strong performance. The metric increased by over 200 basis points to nearly 23%, ranging from 30% in Health Care to almost 21% in Safety & Graphics. This improvement was primarily a result of favorable raw material prices.
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 1.02% to over 1.7% 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 technology company with a global presence in the following businesses: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. 3M is among the leading manufacturers of products for many of the markets it serves. Most of its products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies. Some of the company's most recognizable brands include Scotch Tape products, Post-It notes, ACE bandages, and Thinsulate insulation products. As on December 31, 2016, the company employed 91,584 people (full time equivalents), with 35,745 employed in the US, and 55, 839 employed internationally.
3M is widely considered one of the most innovative companies in the world, with a third of the company's sales come from products which have been launched in the prior five years. The company operates 81 manufacturing facilities in 29 states in the US, and 122 manufacturing and converting facilities in 36 countries outside the US. The company has benefited from its global footprint, with 60% of its sales coming from international markets as of 2016.
We estimate that the Industrial Adhesives and Chemicals business constitutes over 33% of 3M's value, while the Medical Supplies and Dental products division contributes over 22%. 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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