The 3M Company (MMM - Free 3M Stock Report), a diversified manufacturer and technology conglomerate with operations in more than 70 countries, recently reported third-quarter results. The top line rose 6% from the year-earlier figure, to $7.9 billion, which was $32 million ahead of our call and $66 million better than the consensus. Internal sales growth was 6%; acquisitions added 2% to the top line; and negative currency impacts reduced revenues by 2%. Gross margins improved slightly, as COGS rose at a narrowly slower pace than sales, but the operating income margin was lower, due to higher SG&A and R&D expenses associated with ongoing investments in things like innovation and manufacturing. Share net came in at $1.78, which matched our estimate. Wall Street analysts, on average, were only looking for earnings of $1.75 a share. The net profit margin was essentially unchanged from the figure posted this time last year, but $1.5 billion worth of share buybacks executed during the quarter helped buoy per-share results. All of 3M's segments contributed to the positive September-period performance, as sales were up across the board and operating income margins were north of 20% at all five.
The Industrial group, the conglomerate's largest division, reported sales of $2.7 billion. This marked a 9% rise in U.S. dollar terms. Local currency gains were 6% and acquisitions (Ceradyne) added another 4% before negative foreign exchange of 2%. The segment boasted top-line in each major category served, though the aerospace, automotive (OEM and aftermarket), advanced materials, and liquid filtration operations took the lead. Revenues also grew in each major geography, with Latin America/Canada advancing at a double-digit pace. Finally, operating income here held steady at $568 million.
At Electronics & Energy, sales rose 3% overall, to $1.4 billion. Internal top-line growth was 4%, and foreign currency translation reduced revenues by 1%. Both the electronics- and energy-related businesses notched positive sales advances, and the top line grew in all geographies except for the United States. Operating income rose 3%, to $300 million.
Safety & Graphics had a quarter that rivaled the Industrial group's performance, as the top line expanded by 7%, to $1.4 billion. The recent purchase of Federal Signal Technologies boosted the total by 1%, internal sales gains amounted to 8%, and currency translation reduced the figure by 2%. Sales dipped in architectural markets, but rose very strongly in the roofing granules and personal safety areas. All major geographies enjoyed top-line growth, but double-digit gains were notched in Asia/Pacific and Latin America/Canada. Operating income also rose 7%, to $315 million.
Health Care sales rose 6%, to $1.3 million, thanks to organic growth of 7%. Foreign exchange losses were nominal at 1%. Revenues were up across the entire portfolio, led by double-digit growth in food safety and health information systems. Growth was not surprisingly strongest in Latin America/Canada, though all geographies posted sales gains. Operating income expanded by 7%, to $426 million, and the operating income margin remained very high at 32%.
The Consumer business, 3M's smallest, managed to put together a 2% top-line gain. Local currency sales growth was 4%, and divestitures and negative currency translation reduced the total by 2%. Revenue growth was strongest in consumer health care, home care, stationery & office supplies, and DIY. Latin America/Canada and Asia/Pacific paced the group, though all geographies enjoyed top-line growth. Operating income was up 1%, to $247 million.
There was not much reaction on Wall Street following the earnings release, as share-price gains made in the early trading hours were all but wiped off the Big Board by noon in New York. The price of MMM stock has, however, been rising steadily, save a few minor bumps in the road, for the better part of a year. In fact, MMM is up more than 40% over the past 12 months.
We continue to remain relatively upbeat about the company's near-term prospects, and believe growth will be in the mid-single digits this year. As a result, we are leaving our 2013 top- and bottom-line estimates unchanged, at $31.0 billion and $6.72 a share, respectively. (Management recently narrowed 3M's full-year share-net guidance to $6.65-$6.75.)
As far as MMM's investment merits are concerned, we remain very optimistic about the company's future and think handsome average annual share-earnings growth is in the cards for the pull to 2016-2018. The stock does, however, appear to be fairly priced at the current P/E and EV/EBITDA, so 3- to 5-year capital appreciation potential is somewhat unexciting. The dividend yield is decent in this low-yielding environment, at 2.1%.
About the Company:3M Company, a component of the Dow Jones Industrial Average, is a diversified manufacturer that sells more than 50,000 products in 65 countries. Its six business segments include: Industrial & Transportation (34.6% of 2012 revenues); Healthcare (17.3%); Display & Graphics (11.9%); Consumer & Office (14.4%); Safety, Security & Protection (12.7%); and Electro & Communications (10.8%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.