Industrial and Safety & Graphics Segments Will Likely Drive 3M’s Earnings

July 22nd, 2014 by Trefis Team
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3M (NYSE:MMM), a multinational conglomerate, is set to announce its second quarter results on July 24. In the first quarter 2014, 3M’s sales grew 2.6% to reach $7.8 billion. [1] On an organic local currency basis, sales increased 4.6%, well within 3M’s sales growth guidance of 3%-6% for 2014. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. Overall volume grew 3.4% and pricing increased 1.2%. All five of 3M’s business segments – Industrial, Safety and Graphics, Health Care, Electronics and Energy and Consumer – posted positive sales growth in the quarter. We expect 3M’s strong sales growth to continue into the second quarter with growth across all segments. Growth in purification products and products for automotive original equipment manufacturers (OEM) will help drive growth in 3M’s Industrial segment. Increased industrial, housing and construction activity should have a positive impact on 3M’s Safety & Graphics segment.

During its first quarter meet, 3M reaffirmed its full year earnings per share guidance range of $7.30 to $7.55. [2] However, due to the currency impact on the quarter’s results, the full year’s foreign currency impact guidance has been revised to approximately -1%. The company plans to spend $2.5 billion towards capital investments in 2014. 3M reiterated its intention to invest $5 billion to $10 billion in acquisitions through 2017.

See our complete analysis of 3M here

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Purification systems and automotive OEM products will help drive 3M’s Industrial segment

3M’s purification business offers air and water filtration products for residential, commercial and industrial use. The global market for water purification equipment is expected to grow 10% every year till 2018, driven by growing awareness and need for clean water in developing countries like India and China. [3] 3M’s global presence and large number of water purification products position it to benefit from the growth, leading to an increase in its Industrial segment revenues.

3M offers a number of products that are used for manufacturing, repair and maintenance of automobiles. Sales of these products are highly correlated to production of vehicles and average vehicular age. Driven by recovery in the economy, the North American light vehicle production has grown from 8.6 million units in 2009 to 15.5 million units in 2013. [4] [5] Production is expected to grow at a rate of 4% in 2014 driven by increase in consumer spending and high average vehicular age. 3M is set to benefit from continued growth in automobile production since it will have a positive impact on sales of its automotive products, which will help drive overall revenue.

3M expects its industrial segment to grow 3%-6% in 2014. We believe this growth will be driven by continued strengthening in the global economy and growth in end markets such as automotives, chemicals, industrials, construction and packaging.

Growth in industrial, housing and construction activity will drive 3M’s Safety & Graphics Segment

3M’s personal safety products portfolio includes maintenance-free and reusable respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eye-wear, and they are used to protect workers’ health and ensure their safety in an industrial environment. Growth in industrial activity encourages sales of these safety products.

As per preliminary estimates, industrial activity in the U.S grew 5.5% in the second quarter of 2014, 160 basis points higher than the previous quarter. [6] Additionally, industrial activity in the European Union grew 1.4% and 0.5% year-on-year in April and May. [7] Sales of 3M’s safety products in the second quarter will have benefited from growth in industrial activity in these regions.

3M sells roofing granules directly to roof shingles manufacturers. Sales of granules are directly linked to the construction industry, which has been booming in the U.S. Housing starts grew 18% in 2013 to reach 923,400 units [8], and are estimated to reach 1.15 million units in 2014. [9] Though the construction activity was slow during the first quarter of 2014 due to the harsh winter weather, the outlook still remains optimistic. 3M expects its Safety & Graphics segment to grow 3%-6% in 2014.

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Notes:
  1. 3M’s First Quarter 8-K SEC Filing, April 24 2014, www.3m.com [↩]
  2. 3M’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 24 2014, www.seekingalpha.com [↩]
  3. Global Water Purifiers Market Forecast & Opportunities 2018, October 29 2013, www.prnewswire.com [↩]
  4. IHS Automotive Production Barometer, January 2011, www.ihs.com [↩]
  5. North America Production Summary February 2014, www.wardsauto.com [↩]
  6. Industrial Production and Capacity Utilization, July 16 2014, www.federalreserve.gov [↩]
  7. Eurostat News Release, July 14 2014, epp.eurostat.ec.europa.eu [↩]
  8. Housing Starts Forecast For 2014 Past Is Not Prologue, January 17 2014, www.wsj.com [↩]
  9. Strong Single-Family Growth will Fuel Housing in 2014, February 4 2014, www.nahb.org [↩]