Description
3M, based in St. Paul, Minnesota, USA was founded in 1902 as a mining and manufacturing company. Over the years, the company has re-orientated its business to become one of today’s largest diversified manufacturers with a worldwide presence. The company is known especially for popular consumer products such as Scotch Tape and Post-it Notes. The company’s portfolio also contains some 500 patents for various purposes including liquid crystal films, healthcare technology, heavy-duty adhesives and more than 40 technology platforms.
The company has a strong culture of innovation, efficiency and a focus on results. 3M offers several thousands of products based mostly on a few shared technology bases. The company is a champion in leveraging its applications to create a tenfold, or even higher, number of products. The backbone of this success is strong fundamental understanding of product, correctly deploying technology, as well as excellent communication with the potential customer base.
During 2005 to 2012, while George Buckley was CEO, 3M increased the budget for acquisitions by 25%, i.e. 4% of annual cash-flow generation was spent on acquisitions. Under his tenor, the company also reinforced its drive for innovation and new core product applications. As a result of this, the company now reinvents about 1/3 of its products every five years; this ratio was previously at 1/5.
Now under the helm of the new CEO, Inge Thulin, the company is expected to stimulate international sales as the business in North America has started to stagnate. The company’s sales in the US account for 35% of total sales; however, this figure has been constantly decreasing since the year 2000, when US based sales accounted for 53%. Of particular interest now are the emerging markets (Asia, Pacific, LATAM) which already account for about 42% of sales, and which offer higher profitability ratios than other market segment because 3M is often the sole product provider and benefits from short supply distances in these regions. The company’s order/sales cycle is relatively short at 30 days.
Another positive is the company’s recent focus once again on organic sales growth – expected to be in the region of 3 to 5% (year-on-year), while operating margins should hover around the present level of 22%. Sales growth is driven by both volume and price increases. EPS growth has remained steady around the 8% level for the past few years and management has fixed itself a target level of 10% and more for the future. Achieving this target should be possible thanks to a) higher operating efficiencies and b) the increased amount spent on share repurchases. The amount available for the share buyback plan has been increased from about USD 2.5bn to about USD 4bn.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- The company has the advantage of above average international sales growth,
- The company has an excellent acquisition and integration track-record,
- 3M has made a number of acquisitions in recent years, and has never written off any of the goodwill paid,
- Over the past 10 years, 3M has achieved a ROC well above its WACC, and during the same time FCF is at an impressive 15% of sales,
- The EV/EBITA ratio is constant at around 8x.
Weaknesses:
- The company has a relatively short order/sales cycle, which is presently generating a slowdown for US related sales,
- The relatively short cyclical nature of 3M’s business offers limited medium-term visibility,
- Sales growth between 2005 and 2012 was mostly based on acquisitions; recent organic growth is due to product renewal, but will not be long lasting,
- Renewed economic headwinds will challenge company profitability; this applies especially to the present slowdown in EMA,
- Company sales depend largely on consumer electronic related items. US consumers have recently changed their behaviour with the highest allocation presently going to automobiles and related, and less money being spent on staples,
- 3M is exposed to multi-industry company risks,
- With the drive for international expansion, the company is exposing itself to higher political and economic risks, and these are not being sufficiently remunerated.