Like a conspiracy theorist's worst nightmare, 3M (NYS: MMM) is everywhere. Its products populate traffic lights, transmission lines, trucks, tape, thermal underwear, top tech toys -- even your teeth. But despite its size and reach, 3M sagged under larger global pressures in 2011. To bounce back, the company must rely on its greatest strength: relentless invention.
A little Scotch tape will fix that
Rising commodity costs punished 3M in 2011, sanding down the company's still-respectable margins. Worldwide sales growth slowed, at 11.1% compared with 2010's 15.3%. Worse yet, 3M leaned more heavily on outside acquisitions to get there.
In 2010, just 6.1% of 3M's global sales growth came from new purchases. In 2011, that proportion jumped to 47.1% -- an ominous sign for a company that called "new-product innovation" its entire business model in a 2010 Fortune interview.
Don't assume 3M's days of organic growth are done for, though. Under former CEO George Buckley, who stepped down in February, the company built an impressive, innovation-fueling culture. Rather than maintaining walled-off fiefdoms that jealously hoard inventions and personnel, 3M lets employees and ideas circulate among various divisions and different countries. A new 3M product can unite technologies from across the company.
3M also puts cold cash behind its bright ideas. Its pure research and development spending (minus a few other costs the company lumps into its R&D category) topped $1 billion in 2011, up 12% year over year. As a proportion of net sales, the entire R&D category slipped to 5.3% in 2011, from 5.4% in 2010 and 5.6% in 2009. But since 3M isn't spending less to discover new products, perhaps it's simply getting more bang for its buck.
The company's new product vitality index tracks the percentage of 3M sales that come from products developed in the past five years. In 2011, the NPVI reached 33%, up from 31% in 2010 and 21% in 2005. By 2015, 3M aims to get 40% of its annual revenue from recent discoveries.
The power of invention
Few conglomerates directly mirror 3M's diverse offerings. But several blue chips, each with its own reputation for innovation, match different aspects of 3M's operations. Let's see how Minnesota's manufacturing monolith compares with Wall Street's other big thinkers.
2011 Revenue Growth (Y-O-Y)
2011 Free Cash Flow Growth (Y-O-Y)
Current Dividend Yield
|Johnson & Johnson (NYS: JNJ)||18.68||(1.8%)||(19%)||3.6%|
|General Electric (NYS: GE)||16.87||(1.6%)||(18.61%)||3.3%|
|IBM (NYS: IBM)||14.61||7%||1.31%||1.7%|
Sources: Yahoo! Finance; respective company 10-Ks and annual reports; Ycharts.com.
GE and J&J compete with 3M in medical technology, and GE also vies with 3M in industrial and transportation manufacturing. But while both rivals pay greater dividends, they also sport higher P/Es, deeper cash-flow shortfalls, and shrinking revenue.
Like 3M, IBM wields a mighty patent portfolio, and its $6 billion in annual R&D spending dwarfs 3M's outlays. But even with a relative lack of manufacturing, and a margin-friendly, service-oriented business model, IBM posted a smaller percentage gain in 2011 revenue, a tinier dividend yield, and only a modestly larger increase in free cash flow compared with 3M.
Despite its short-term woes, 3M looks like the best mix of performance and payouts for Fools eager to invest in innovation. As a 3M shareholder, this Fool finds it hard to bet against any company with a nearly invisible presence in almost every facet of our daily lives. (That's why I've green-thumbed it in Motley Fool CAPS.) Watch the company's NVPI figure closely to see whether new CEO Inge Thulin can foster even more of those bright ideas.
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At the time this article was published Fool writing coach Nathan Alderman awaits silent Tristero's empire. He owns shares of 3M but holds no financial position in any other company mentioned. The Motley Fool owns shares of Johnson & Johnson and IBM, buying shares of 3M and J&J, creating a diagonal call position in Johnson & Johnson and 3M, and creating a synthetic long position in IBM. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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