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3M Reiterates to Neutral - Analyst Blog
11/23/2011 5:23:00 PM
We recently maintained a Neutral recommendation on 3M Company ( MMM ).
Based in St. Paul, Minnesota, 3M is a diversified technology company with manufacturing operations spread over 60 countries worldwide. It has more than 35 business units organized into six segments: Consumer and Office, Display and Graphics, Electro and Communications, Healthcare, Industrial and Transportation, Safety, Security and Protection Services Business. The company's Industrial and Transportation segment generates highest portion of total revenue (about 34% in third quarter 2011).
The 3M brand is recognized and trusted around the world. Household names like Nexcare™, Post-it®, Scotch®, Scotch-Brite® and Scotchgard™ are market leaders. The company remains focused on inventing new products, with its scientists and innovators enjoying an important competitive advantage worldwide. The efforts of 3M have driven its NPVI (New Product Vitality Index) up by 34.4% in 2010 compared with a weakening NPVI in the teens a few years ago.
Recently, the company came out with its third-quarter 2011 earnings result, reporting earnings per share of $1.52, below the Zacks Consensus Estimate of $1.61. Earnings per share inched down 1% year over year. Total revenue in the quarter increased 9.6% year over year to $7.5 billion. Besides, weakening electronic markets along with declining growth in developed economies negatively affected organic volume in the quarter.
Sales increased in all segments of the company, except Display and Graphics, which witnessed a year-over-year decline in sales by 14.1% in local currency to $935 million, primarily due to a decline in sales of optical systems. A rise in organic volumes, increased prices and acquisitions led to sales growth of 18.8% in Industrial and Transportation, 17.6% in Security and Protection services, 14.0% in Healthcare and 6.8% in Consumer and Office. The Electro and Communications business sales increased by 4.4%.
Furthermore, sales rose in every region of the world (in terms of local currency), with Asia Pacific increasing 2.1%, Latin America/Canada surging 11.2%, Europe growing 5.9% and the United States climbing 9.2%. 3M is benefiting significantly from its business in the emerging markets. Developing markets are seen as the prime benefactor.
We believe that continued capital expenditure with new product launches and an increased focus on the emerging markets like China, India, etc. should bolster its prospects across most end markets.
However, 3M's growth objectives are largely dependent on timing and market acceptances of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to market at acceptable price points. Further, the company faces tremendous local competitive pressure, whether it is in Brazil, China, India or Indonesia.
3M believes that to survive in the competitive environment, it will have to locally develop, manufacture, hire, purchase and lead. While doing so, it will face insurmountable issues. The major competitors of 3M are Avery Dennison Corporation ( AVY ), EI DuPont de Nemours & Co. ( DD ) and Johnson & Johnson ( JNJ ).
Weak economic conditions continue to prevail in certain markets, resulting in a lowering of inventory levels by customers. As a result of this, 3M's sales growth in Western Europe was affected in the quarter. However, the company expects to see quick benefits as these markets revive. Therefore, we prefer to move forward prudently. We expect the company to perform in line with the market and hence maintained a Neutral recommendation.
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