- Safety & Industrial constitutes 37% of the Trefis price estimate for 3M's stock.
- Healthcare constitutes 28% of the Trefis price estimate for 3M's stock.
- Transport & Electronics constitute 21% of the Trefis price estimate for 3M's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus On 3M's Stock
- 3M stock lost more than 34% – dropping from $180 at the beginning of 2020 to below $119 in late March 2020 – then spiked over 65% to around $198 now (through Jul 28, 2021). That means it has fully recovered to the pre-pandemic levels.
- Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. Further, with economies opening up gradually, demand for 3M’s products and services will likely pick up. In addition, the company posted better than expected results over the recent quarters, boding well for MMM stock.
- Q2 2021 Earnings
- 3M reported a 25% revenue growth to $9.0 billion in Q2 2021, compared to $7.2 billion in Q2 2020. While all four segments saw positive growth during the quarter, Transportation & Electronics revenues saw highest growth, up 28% y-o-y. Looking at 3M's bottom line, Adjusted EPS grew 43% to $2.59, compared to $1.81 in the prior year quarter.
- 3M Completes Acelity Acquisition
- 3M completed the acquisition of Acelity for a total enterprise value of $6.7 billion through debt and available cash. Acelity is a medical technology company that provides advanced wound care and specialty surgical applications under the Kinetic Concepts (KCI) and Systagenix brands. Acelity and its KCI subsidiaries will be integrated with 3M's medical solutions business, under the Healthcare segment. Notably, 3M paid $6.7 billion to acquire Acelity at a EV/EBITDA multiple of 11x.
- 3M suspends operations at Venezuela subsidiary
- 3M suspended its local operations in Venezuela for the foreseeable future, citing market turmoil and lower demand in the South American nation. 3M said that "in light of continuing challenging circumstances in Venezuela, including its unstable environment and heightened unrest that have led to a sustained lack of demand" in the Venezuela market. Venezuela's economy has largely collapsed in the past year.
- Strategy of Portfolio Management
- 3M has been very active on the M&A front in recent years, having made significant acquisitions such as Scott Safety, Capital Safety, Polypore’s Separations Media business, and Ivera. The company has also made an effort to slim down. Some of the big-ticket sales include that of its Static Control and Library Systems businesses, and Faab Fabricauto.
- Since 2012, 3M has gone from six sectors to four business groups, and has pruned its businesses or divisions from 40 to 28, thereby improving customer relevance, productivity, and speed, through a leaner operating structure.
- 3M was quite active on the M&A front in 2019, and undertook a number of divestitures in its Transportation Safety division with an intent of improving its portfolio. This included the sale of its Identity Management business, Tolling and Automated License/Number Plate Recognition business, and its Electronic Monitoring Business. Acquisitions, net of divestitures, increased sales by 5.1 percent.
- China to Power Growth in the Future
- 3M has had a presence in China since 1984 when it was the first wholly-owned foreign enterprise that was set up outside the Shenzhen economic zone. The company has grown to over $3 billion in sales from the region, and continues to see the country as an attractive growth opportunity.
- 3M has a solid footing in the country as a result of its base in the infrastructure and manufacturing business. Improvements in the safety, healthcare, and retail businesses in China have helped to spur the growth of these businesses of 3M as well, which currently represent over $1 billion of its $3 billion China portfolio. The company has been able to achieve this by using scale to drive growth in its domestic-oriented business that can ensure sustainable growth even in the future.
Given the possibility of a trade war with China, one factor that may work in 3M's favor is that the company has focused on local manufacturing, in the sense that it manufactures within China for its Chinese customers. Consequently, the impact of the steel and aluminum tariffs are expected to be minimal.
3M is a diversified technology company with a global presence in the following businesses: Safety & Industrial; Transportation and Electronics; Health Care; 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.
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 has benefited from its global footprint, with 60% of its sales coming from international markets.
SOURCES OF VALUE
We estimate that the Safety & Industrial business constitutes around 36% of 3M's value, while the Health Care constitutes of 29%, Transport & Electronics 21% and Consumer divisions contribute 14%. The following factors are also helping to drive the company's value.
- Consistent innovation and aggressive acquisitions drive Industrial market share
- 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. 3M will also benefit from an increased demand from automotive, aerospace, and industrial adhesives and tapes customers, with its growth driven by Asia-Pacific.
- 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.
- Coronavirus Crisis
- With the global economy slowing down due to the impact of Covid-19, the consumer spending power has declined. 3M in particular navigated well in 2020, driven by its personal safety products (such as masks and PPE), home improvement and healthcare businesses. 3M’s stock has already recovered to pre-pandemic levels.
- 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, have 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 with a number of currencies. Due to the significant strength of the U.S. dollar, FX has tempered its earnings of late.