What Is the Opportunity for 3M?
Dec 11th 2012 2:13PM
Updated Dec 11th 2012 2:14PM
3M is one of the most consistent companies on the market, paying out a dividend for nearly a century. But over that time it's built a sprawling, complex business that makes it difficult to see how large the company's opportunity truly is.
To analyze the opportunity I've taken a deep dive into the company in our special report on 3M. Below, you'll find an excerpt from the report. To find out more about 3M and this premium report click here for more details.
3M has long been recognized as one of the most innovative companies in the world, which means the company does more than invent new things; it turns ideas into profitable products, otherwise known as "innovation." The company has also paid a dividend for 383 straight quarters (over 95 years) and has increased its dividend for 52 straight years. 3M is able to continue this payment to investors because the company has a diverse stable of products from electronics to health care to renewable energy.
From a current line of 55,000 products, 3M grows and expands its business in two ways — with organic growth and acquisitions. Organic growth is driven by R&D spending, which has developed products like Scotch Tape, Post-It Notes, and Multi-layer Optical Film. This has been at the core of 3M's growth since its inception, but in the past decade the company has focused more money on acquisitions. Recently, the company has purchased security company Cogent for $943 million, ceramics maker Ceradyne for $847 million, and even tried to buy office products company Avery. These large acquisitions, along with dozens of "bolt on" acquisitions, have accounted for a large percentage of the company's growth since 2000.
But the strategy is shifting to more organic growth, which has been stuck at 3% for the past decade, by increasing R&D spending to 6% of sales by 2017 from 5.3% in 2011. There's also a renewed focus on what 3M calls the New Product Vitality Index, which measures the sales from products created in the past five years. 3M increased this index from 23% in 2007 to 33% in 2012, and hopes to increase to 40% by 2017 with the increased R&D spending.
The business is split into five groups called Consumer, Industrial, Healthcare, Safety & Graphics, and Electronics and Energy, which are summarized as a percentage of total sales in the chart below.
Consumer is the most well-known group, but in reality it is the smallest for 3M. At a conglomerate like 3M it's close to impossible to define the opportunity across each segment, so we'll go over a few of the drivers for the company going forward.
Safety and Graphics includes films that make many of the products we know and love possible. Previous versions of the iPhone contained as many as six separate 3M films to control light within the device and make the screens brighter. These films are used in everything from smartphones to giant LCD TVs, and even next generation OLED TVs. Personal safety is a business that 3M thinks will turn into a $3.0-plus billion business in five years, growing more than 6% annually.
The Electronics and Energy business is one of 3M's least-known businesses to most consumers, but it generates a large percentage of 3M's sales. This includes touch systems, electronic components like connectors, and infrastructure products. If this business is going to grow by leaps and bounds it will be lead by energy. Mining, oil, and gas solutions are also a clear focus going forward. In 2008, 3M had just $600 million in sales from this area of energy but that expanded to $1.0 billion in 2012 and is expected to be a $2.0 billion business in 2017. Acquisitions like Ceradyne will augment R&D investments to meet this goal.
The Industrial business is actually 3M's largest and it includes staples in industry like sandpaper, adhesives, and automotive products. Industrials have grown at a 6% compound annual rate since 2008 but still have a lot of room for expansion. The $1.5 billion abrasive unit is growing at 9% annually but still only holds a 10% market share in a $15 billion business, and aerospace is a $3 billion untapped market. Even the electronics section is expected to be a growth engine with the market expanding 7.3% annually over the next five years.
Healthcare is 3M's most stable business and again the company offers a multitude of products that patients don't often know they're using. 3M is one of the largest suppliers in the dental and orthodontics markets, developing technologies that allow for faster application of braces and clear fillings. The health care market is expected to grow 6% globally in the next five years, driven by double-digit growth in developing nations like China and India.
Finally, there's the Consumer business, which most people are most familiar with. This business makes everything from Post-It Notes to lint rollers to Command Strips that hang in your shower. The consumer business is full of competition but 3M has demonstrated the ability to incrementally improve each of these products to grow the business. In 20 years we may or may not be using iPhones, but I'd be willing to bet that Post-It Notes and Scotch Tape still would be a staple for consumers.
3M's diverse product line opens a world of possibility for engineers and gives upside for investors. But what will drive 3M into the future is the ability to reinvent itself by creating new products and innovating current products. The biggest question right now is whether invention and innovation are alive and well at 3M.
A long history of invention and innovation has driven the company to its wide reach, but a focus on operational efficiency may be hurting the creative culture that once created Scotch Tape and the Post-It Note. A new leader has taken over and vows to return innovation to the forefront. Does this mean the stock will become more than a dividend, returning to its former glory as a growth stock once again? Find out whether 3M has what it takes to pull it off in The Motley Fool's comprehensive new research report on the company. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out -- simply click here now to claim your copy today.
The article What Is the Opportunity for 3M? originally appeared on Fool.com.Fool contributor Travis Hoium has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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