3M’s Focus On Its Core Levers To Bode Well In The Third Quarter

by Trefis Team
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2017 has been a good year for 3M (NYSE:MMM). Its stock has been trending upwards since the beginning of the year, rising almost 24%. This has been a result of the strong performance posted by the company in the first quarter, as well as the focus the company has placed on its three levers, which will ensure growth in the long term. Though the stock took a hit after the second quarter earnings, the rise in the stock price seems to be back on.

Analysts expect this feel-good factor of the company to continue in its third quarter earnings as well. 3M is set to report its Q3 earnings on October 24th, wherein an improvement in both revenue and earnings per share is anticipated. An EPS of $2.21 on revenues of $7.92 billion has been estimated, implying a growth of 2.8% and 2.7%, respectively.

Progress On The Three Levers

3M continues to execute on its three levers, which will help ensure growth in the long term.

1. Portfolio Management- The company completed the purchase of Scott Safety from Johnson Controls, which will help to strengthen its position in the attractive personal safety market. It has also sold its Identity Management business, its Tolling and Automated License/Number Plate Recognition business, and its Electronic Monitoring Business in its Transportation Safety division in order to focus on “connected roadways.”

2. Investing in Innovation- The company invested $473 million in R&D in the second quarter, or 6.1% of the sales, up from $437 million in the year-ago period. This included increasing the resources in the field to bring the scientists and application engineers closer to the market.

3. Business Transformation- The roll-out of the new ERP (Enterprise Resource Planning) system in Western Europe was almost complete, as of end-June 2017.

In addition to this, the company also undertook an investment of $75 million to accelerate growth in the core platforms. These are expected to continue throughout the year, contributing to 50 to 100 basis points of growth in 2017. Furthermore, 3M has invested another $239 million in the first half of 2017 to optimize its portfolio and manufacturing footprint, as part of its five-year plan laid out in March 2016.

Focus On The Margins

In the second quarter, 3M posted an operating margin advancement of 360 basis points. On the face of it, this improvement in margins is very impressive. However, if we delve a little deeper, a majority of this expansion was a result of the divestitures undertaken in the Safety & Graphics business, which improved its margins by 28.1 percentage points. Its other businesses, besides E&E, witnessed margin contractions. Once divestiture gains on its margins are discounted, the margins actually underwent a decline. In the second half of the year, the company expects its Industrials segment to post a 50 basis points margin improvement. This is expected to be driven by price increases, improved results from its productivity programs, and cost-cutting.

The company has been undertaking a number of strategic investments, slated to total approximately $400 million this year, which are expected to yield significant savings to the company. When such initiatives include steps like reducing the workforce, the payback is quick. However, when it involves optimization of its manufacturing or supply chain, such as what 3M has been doing recently, the fruits of this labor take a while to reflect in the margins.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for 3M.
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