On March 10, we issued an updated research report on industrial goods manufacturer, 3M Co (MMM).
3M continues to witness sustainable increase in earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs. The company’s ability to convert high R&D spends into up-cycle market share gains and strong pricing powers are the reasons behind its success.
Organic growth remains the first priority of the company as it continues to invest in infrastructure and commercialization capability.
At the same time, 3M has initiated some prudent steps to strengthen and focus on its core portfolio of businesses. The portfolio restructuring efforts of the company hinges on divesting assets that no longer fit its corporate strategy, while investing in lucrative markets that hold promise of healthy margins. Since 2012, the company has pruned its businesses from 40 to 26, thereby improving customer relevance, productivity and speed through a leaner operating structure. These initiatives portray the solid long-term growth potential of the company.
With core business focus, 3M has outperformed the Zacks categorized Diversified Operations industry in the last three months with an average return of 5.8% compared with a paltry 0.3% gain for the latter.
Recurring earnings for the company has grown at a CAGR (compounded annual growth rate) of 7.2% from 2009 to 2016 on revenue growth of 3.4% during this period, despite volatility in markets due to recession and other macroeconomic factors.
Portfolio management, investment in innovation and business transformation are the three key areas on which the company intends to focus moving forward. 3M also intends to continue investing in capital expenditures and research and development to support organic growth as it targets a prudent capital structure strategy and increased capital deployment. 3M’s global footprint, diversified product portfolio and the ability to penetrate in different markets have been its forte.
For the five-year period of 2016–2020, 3M expects 8–11% growth in earnings per share driven by an organic sales growth of 2–5%. The company expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%.
Furthermore, 3M is standardizing its business processes through a new, global ERP system.
The company expects these efforts to result in $500 million to $700 million in annual operational savings by 2020 and an additional $500 million reduction in working capital. Such focused attempts to maintain growth momentum is commendable.
We remain impressed with the long-term growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry include Hitachi, Ltd. (ADR) (HTHIY), Swire Pacific Ltd (SWRAY) and Barloworld Limited (ADR) (BRRAY), each carrying a Zacks Rank #2 (Buy).
Hitachi has a long-term earnings growth expectation of 13% and is currently trading at a forward P/E of 13.5x.
Swire Pacific is currently trading at a forward P/E of 15.6x.
Barloworld has a long-term earnings growth expectation of 18.7% and is currently trading at a forward P/E of 11.0x.
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