Is Buying 3M Stock a Smart Health Care Play?
Jun 21st 2013 10:44AM
Updated Jun 21st 2013 10:46AM
Not every health care investment is a health care investment. How is that possible? Investors can buy shares of a company that benefits from the growth of health care but isn't exclusively in health care itself. 3M is a great example. The Minnesota-based giant has interests in a variety of business sectors, one of which happens to be health care. Could buying 3M stock still be a smart health care investment choice? Let's examine.
While 3M originally stood for Minnesota Mining and Manufacturing, today those Ms today could just as easily mean "medical products, microbiology, and management systems." Net sales for the company's Health Care business segment in 2012 totaled $5.1 billion. This ranks Health Care as 3M's second-largest unit, trailing only Industrial & Transportation.
3M's medical products include a variety of offerings, from adhesive surgical tapes to stethoscopes. On the microbiology front, the company's product line includes pathogen testing, hygiene monitoring tests, and other solutions that address food safety. 3M Health Care's health information management tools span from diagnosis coding software for hospitals and physician offices to revenue cycle management systems.
All of the focus on health care pays off. While the Health Care segment accounts for 17% of total net sales, it contributes 25% of the company's total operating income. And profitability levels for the segment are growing -- by 10.6% in 2012.
However, 3M Health Care's sales aren't growing as strongly. Net sales increased by only 2.5% in 2012 compared to the prior year. This low single-digit growth stems partially from stiff competition.
Covidien battles against 3M for market share in the medical devices and supplies arena. Net sales for Covidien's medical devices unit in 2012 were $8.1 billion. The company's medical supplies segment contributed another $1.7 billion in sales. The total of the two business segments nearly doubles that of 3M Health Care.
Additional competition comes from Kimberly-Clark . The company is more well-known for its consumer products such as diapers, paper towels, and tissues, but it also has a large health care business segment. Last year, Kimberly-Clark generated sales topping $1.6 billion from its medical devices, surgical products, and infection prevention products. While this total represented less than 8% of total sales, the company intends to shift more resources to the health care unit in the future.
Johnson & Johnson stands as another big rival for 3M Health Care. J&J's scale dwarfs that of the other competitors, though. The company's Medical Devices and Diagnostics business segment generated revenue in 2012 of $27.4 billion -- 6.4% higher than the prior year. This amounted to a little over 40% of J&J's total sales to customers.
From an investor's viewpoint, 3M stock holds its own against the three competitors. It is running neck-and-neck with J&J so far in 2013 and stands well ahead of both Kimberly-Clark and Covidien.
So, is buying 3M stock a smart health care play? I have three thoughts on the subject.
First, putting health care aside for a moment, 3M has always been a solid, well-run company. I don't expect that to change. You could buy 3M stock, pull a Rip Van Winkle trick by sleeping for 20 years, and wake up without worries that the company has gone out of business.
Second, although 3M generates hefty revenue from health care, the segment's numbers aren't awe-inspiring. If 3M Health Care was a separate entity without the 3M connection, it wouldn't be even close to the top of my list for intriguing health care investing opportunities.
Third, whether buying 3M stock is a good investment really depends on the investor. If you like those "Rip Van Winkle" kind of stocks, 3M isn't a bad choice at all. If you're looking more for growth, keep looking.
The article Is Buying 3M Stock a Smart Health Care Play? originally appeared on Fool.com.Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends 3M, Covidien, Johnson & Johnson, and Kimberly-Clark. The Motley Fool owns shares of Johnson & Johnson. 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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