3M COMPANY $93 (New York symbol MMM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 715.8 million; Market cap: $66.7 billion; WSSF Rating: Above average) is a diversified manufacturer formerly known as Minnesota Mining & Manufacturing. 3M owns a range of well-known brand names. Post-it notes, Scotch tape, Scotch-Brite household cleaning products, Scotchguard protection and Thinsulate insulation are just a tiny sample of its wide product line. The company sells more than 50,000 products in over 200 countries. Foreign sales are about 63% of total revenues. 3M’s six business segments comprise industrial and transportation (approximately 30% of sales), display and graphics (16%), health care (16%), consumer and office (14%), safety, security & protection (13%) and electronics and communications (11%). 3M’s revenue rose 40.5%, from $16.3 billion in 2002 to $22.9 billion in 2006. However, earnings before unusual items almost doubled, from $2.0 billion in 2002 to $3.9 billion in 2006, while earnings per share jumped from $2.50 to $5.06. In the three months ended June 30, 2007, sales rose 8%, to $6.1 billion from $5.7 billion a year earlier. Adjusting for the January 2007 sale of its branded pharmaceutical division in Europe, sales rose 11.8%. In the latest quarter, all six of 3M’s segments reported sales growth, led by healthcare’s 23% rise and a 20.7% gain in safety, security and protection services. International sales volume rose 10%. Excluding one-time items, earnings rose 11.3%, to $899 million from $808 million. Earnings per share rose 17.1%, to $1.23 from $1.05, due to 3M’s active share buyback program, which reduced shares outstanding by 4.9%.
Reasonable p/e for a global leader
At its current share price, the stock trades at 18.8 times expected 2007 earnings of $4.95 a share. The company pays a $0.48 quarterly dividend, which currently gives the stock a yield of 2.1%. The company is now restructuring its U.S. plants and building 18 new overseas plants — nine in the Americas, four in China, two in Poland and one each in India, Russia and Korea. This puts its factories closer to their global markets. It also lets the company produce its products more quickly. Currently, 50% of 3M’s products take 100 days to produce. The company hopes to reduce this to 60 days by 2009. Closing older U.S. plants and building new, more efficient plants should also result in cost savings. In late 2005, 3M appointed George Buckley as chairman and CEO. Buckley has a PhD in engineering, and he has reinvigorated 3M’s tradition of product innovation.
New focus on research should pay off
3M now spends 6.6% of its revenues on research. The company is directing research resources into 45 core areas of 3M technology, ranging from abrasives to nanotechnology. The company can easily afford to expand research spending and invest in new growth projects. It has $1.9 billion ($2.62 a share) in cash and just $1.8 billion in long-term debt (17% of stockholders’ equity). Goodwill and other intangible assets are high at nearly 50% of equity. However, 3M prefers to buy smaller companies with technologies that enhance its current product offerings. That cuts the risk of a big writedown if acquisitions don’t work out. As a huge, widely diversified conglomerate, 3M will gain automatically from global economic growth. However, its established brands and markets plus its high research spending should spur its growth for the foreseeable future. We’re adding it to our WSSF Conservative Growth Portfolio. 3M is a buy.
