What Really Drives 3M's Growth?
Sep 16th 2013 5:11PM
Updated Sep 16th 2013 5:12PM
3M is known for a lot of products people use every day: the Post-It Note, Scotch Tape, and Scotchgard, just to name a few. But they aren't the growth driver for 3M these days.
3M's consumer business, which makes most of the products you know and love, is the smallest of its five big businesses, with $4.4 billion in sales and a compound sales growth rate of 8% over the past three years. But it's actually the industrial business, with $9.9 billion in sales and a 13% compound growth rate in the past three years, that now drives 3M.
Going back to the beginning
One of the core products in 3M's industrial business is sandpaper. That's fitting, because 3M began as a failed mine that turned out to contain great raw minerals for sandpaper. Today, abrasives are much more than just your average household sandpaper; they include everything from auto abrasives to precision grinding wheels.
Abrasives provide the foundation for 3M divisions like Automotive OEM, Automotive Aftermarket, Aerospace, and obviously, Abrasives. This gave 3M a foothold in these markets and allowed its lab to grow solutions for those end markets. An incredibly broad number of tapes and glue-type products are in nearly every car and aircraft, and are now being used in renewable energy as well.
After abrasives and tapes, filters play a huge roll across 3M, particularly in the industrial business. Again, this is more than just the Filtrete filter you put in your home air conditioner. 3M makes coffee filters, water filters, and even filters for industrial processing that cost thousands of dollars apiece. Filtration is big business.
Searching for growth in the industrial business
Those three major products build a foundation for 3M to expand upon, both organically and through acquisitions. The company's acquisition of Ceradyne, a maker of advanced ceramics, will help drive future growth in the industrial business and bring it into new markets. An $80 million order for 77,000 Ceradyne-enhanced combat helmets from the U.S. Marine Corp. last week is just one example of that growth.
One growth opportunity that has yet to create dividends is the renewable energy business. 3M provides adhesives, abrasives, and other products to wind and solar, but the real opportunity is in integrating 3M products into these industries. So far, 3M has failed to do that, betting on thin-film solar instead of the dominant polysilicon technology. The division saw revenue fall 10% last quarter, incredibly disappointing considering the growth overall in the industry. This segment could be a high-flyer if 3M can get renewable energy right.
Don't underestimate what you can't see
Consumers will never see most of what 3M makes in its industrial business. But as 3M's largest and fastest-growing business, it's key to the company's future. Don't underestimate how important products like abrasives, adhesives, and filters can be for a company as diverse as 3M.
The article What Really Drives 3M's Growth? originally appeared on Fool.com.Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends 3M. 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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