January 29, 2015 3M Company Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 04/27/2010 Current Price (01/28/15) $163.94 Target Price $172.00 52-Week High $167.27 52-Week Low $123.90 One-Year Return (%) 28.38 Beta 1.09 Average Daily Volume (sh) 2,328,765 Shares Outstanding (mil) 636 Market Capitalization ($mil) $104,272 Short Interest Ratio (days) 4.39 Institutional Ownership (%) 68 Insider Ownership (%) 1 Annual Cash Dividend $3.42 Dividend Yield (%) 2.09 5-Yr. Historical Growth Rates Sales (%) 5.7 Earnings Per Share (%) 6.8 Dividend (%) 11.4 using TTM EPS 21.9 using 2015 Estimate 20.1 using 2016 Estimate 18.3 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page (MMM-NYSE) SUMMARY 3M registered strong fourth quarter 2014 results with a healthy year over year rise in earnings that beat the Zacks Consensus Estimate by $0.02. The company further expects to have an organic sales growth of 3%-6% in 2015 on the back of continuous product improvements and new product launches. 3M has also realigned its operating segments to better serve its global customers. In addition, the company remains focused on emerging markets and expects to have significant contributions from them. However, stiff competition and adverse currency translations are likely to peg back its profitability to some extent. Nevertheless, we maintain our longterm Neutral recommendation for the stock. Risk Level * Low, Type of Stock Large-Growth Industry Diversified Ops Zacks Industry Rank * 189 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 7,634 A 7,752 A 7,916 A 7,569 A 30,871 A 2014 7,831 A 8,134 A 8,137 A 7,719 A 31,821 A 2015 7,981 E 8,295 E 8,360 E 8,034 E 32,670 E 2016 34,148 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.61 A $1.71 A $1.78 A $1.62 A $6.72 A 2014 $1.79 A $1.91 A $1.98 A $1.81 A $7.49 A 2015 $1.94 E $2.08 E $2.17 E $1.98 E $8.17 E 2016 $8.98 E Projected EPS Growth - Next 5 Years % 10 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW 3M Company together with its subsidiaries operates as a diversified technology company with manufacturing operations spread over 70 countries worldwide. Founded in 1902, the St. Paul Minnesota-based company was formerly known as Minnesota Mining and Manufacturing Company. Effective from first quarter 2013, the company has reorganized its segments to better serve its global customers. The realigned structure includes five operating segments compared to the erstwhile six segments of the company. The new business segments of 3M are Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer. The Industrial segment was previously known as Industrial and Transportation and has largely remained unchanged, except the Renewable Energy Division, which has been transferred to the Electronics and Energy business segment. The segment offers tapes, coated and non woven abrasives, adhesives, specialty materials, filtration products, closures for hygiene products, and components and products that are used in the manufacture, repair, and maintenance of automotive, marine, aircraft, and specialty vehicles. Safety and Graphics segment is a combination of certain product lines between various earlier divisions and includes Architectural Markets, Building and Commercial Services, Commercial Graphics, Industrial Mineral Products, Personal Safety, and Traffic Safety and Security. Electronics and Energy segment is also a combination of certain product lines between various earlier divisions and includes Communication Markets, Electrical Markets, Electronics Markets Materials, Electronic Solutions, Infrastructure Protection, Optical Systems, Renewable Energy, and 3M Touch Systems. The Health Care segment is mostly unchanged and provides medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems, and anti-microbial solutions. Consumer segment was previously referred to as Consumer and Office, and has largely remained unchanged. This segment provides office supply products, stationery products, construction and home improvement products, home care products, protective material products, and consumer health care products. Equity Research MMM Page 2
REASONS TO BUY The 3M brand is one of the most recognized and trusted names around the world. Household products like Nexcare, Post-it, Scotch, Scotch-Brite, and Scotchgard are market leaders in their individual categories. The company remains focused on inventing new products, with its scientists and innovators enjoying a competitive advantage worldwide. The company expects to further leverage its balance sheet to provide higher returns to shareholders. 3M is investing heavily to bolster its competitive edge in the future. At the same time, the company is continuing with its portfolio restructuring efforts by divesting assets that no longer fit in the company s strategy and continues to make investments in other lucrative markets. 3M recently completed the divesture of its Static Control business to Desco Industries, Inc. for an undisclosed amount. By divesting this business, 3M intends to concentrate more on its core operations. These offer a lucrative investment proposition for investors seeking to own blue-chip stocks that promise a healthy return on investments. 3M continues to deliver sustainable increases in sales, 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 determine its success. Organic growth remains the first priority of the company as it continues to invest in infrastructure and commercialization capability. In addition, 3M aims to respond to strategic acquisition opportunities that can strengthen its portfolio. The company expects significant opportunities in Japan's addressable markets for healthcare, safety and graphics and consumer businesses. Additionally, 3M realigned certain businesses to increase customer relevance, scale businesses and generate cost efficiency. In the safety and graphic business group, it merged commercial graphics and building and commercial services to form a new commercial solutions division. This brings complete array of branding, design, protection, and maintenance solutions to its commercial customers under one division. Healthcare is one of the highest investment priorities for the company. Over the past several years, 3M has made substantial investments to bolster its healthcare businesses in China, Germany, Poland, Thailand, India, the United Kingdom and the United States. All these bode well for the long-term growth of the company. Portfolio management, investment in innovation and business transformation are the three key levers on which the company intends to focus moving forward. For the five-year period from 2013 17, 3M affirmed its financial objectives and remained confident of achieving its set targets. These include average earnings per share growth of 9% 11% per year, average organic sales growth of 4% 6% per year, a 20% return on invested capital and 100% conversion of net income to free cash flow. 3M also intends to continue investing in capital expenditures and research and development to support organic growth as it aims a prudent capital structure strategy and increased capital deployment. 3M's global footprint, diversified product portfolio and the ability to penetrate in different markets is likely to augment its revenues in the long term. We also remain encouraged by the top-line growth of the company in the reported quarter and expect it to continue its bull run in the coming quarters. REASONS TO SELL Given its international presence, adverse foreign currency translations are likely to affect the company s ability to realize projected growth rates in its sales and earnings. Fluctuations in foreign currency exchange rates affect the company s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions. These undermine its long-term growth to some extent. The company s growth objectives are largely dependent on timing and market acceptances of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to market at acceptable price points. 3M generally manages commodity price risks through negotiated Equity Research MMM Page 3
supply contracts, price protection agreements and forward physical contracts. These make it susceptible to commodity prices risk. The company faces tremendous local competitive pressure, whether it is in Brazil, China, India or Indonesia. 3M believes that in order to survive in the competitive environment, it will have to locally develop, manufacture, hire, purchase and lead. These are likely to reduce its profitability to some extent due to continuous investments in value drivers that act as a hedge against stiff competition RECENT NEWS 3M Q4 Earnings Beat Estimates, Revenues Up Y/Y December 31, 2014 3M reported fourth-quarter 2014 net income of $1,179 million or $1.81 per share compared with $1,103 million or $1.62 in the year-earlier quarter. The reported earnings per share beat the Zacks Consensus Estimate of $1.79. The increase in earnings was driven by higher sales. For full-year 2014, the company recorded net income of $4,956 million or $7.49 per share versus $4,659 million or $6.72 per share in the year-ago period. The reported earnings per share beat the Zacks Consensus Estimate of $7.45. Net sales during the quarter were $7,719 million, up 2.0 % year over year but below the Zacks Consensus Estimate of $7,779 million. The year-over-year increase in sales was driven by 6.3% organic local currency sales growth and 0.1% impact of acquisitions, partially offset by currency impact of 4.4%. Operating income for fourth-quarter 2014 was $1.7 billion, while operating margin was 21.5%. For full-year 2014, revenues were $31,821 million compared with $30,871 million in the year-ago period. Full-year 2014 revenues missed the Zacks Consensus Estimate of $32,021 million. The year-over-year increase in sales was driven by 4.9% organic local currency sales growth, partially offset by currency impact of 1.9%. Full-year 2014 operating income margins were 22.4%, up 0.8% year over year. Segment Results Industrial segment sales increased 1.4% year over year in local currency to $2.6 billion in the reported quarter driven by an increase in sales in all major geographies. Organic local-currency sales increased 5.9% year over year due to strong sales in advanced materials, aerospace and commercial transportation, industrial adhesives and tapes and automotive aftermarket. Health Care segment sales climbed 2.4% in local currency to $1.4 billion in the reported quarter, aided by growth in all major geographic regions. Organic local-currency sales increased 6.4% year over year with growth in health information systems, food safety, infection prevention and chronic care. Consumer segment revenues were $1.1 billion in the reported quarter, up 2.2% year over year in local currency, driven by increase in sale in all geographies except EMEA regions. Organic local-currency sales growth of 5.8% was attributable to consumer health care and home care businesses. Safety and Graphics segment sales rose 3.4% year over year in local currency to $1.4 billion with strong performances in Asia Pacific, Latin America/Canada and EMEA regions. Organic local-currency sales growth of 9.2% benefited from personal safety and commercial solutions businesses. Electronics and Energy segment revenues were $1.4 billion in the reported quarter, up 3.3% in local currency as sales increased in Latin America/Canada, Asia Pacific and EMEA while it was flat in the U.S Equity Research MMM Page 4
year over year. Organic local-currency sales edged up 6.2% driven by strong growth in display materials and systems and electronics materials solutions. Balance Sheet and Cash Flow Cash and cash equivalents as of Dec 31, 2014 were $1,897 million compared with $2,581 million as of Dec 31, 2013. Long-term debt stood at $6,731 million as of Dec 31, 2014 compared with $4,326 million as of Dec, 31 2013. Free cash flow as of Dec 31, 2014 stood at $5,133 million versus $4,152 million in the prior-year period. For full year 2014, 3M paid $2.2 billion in cash dividends to shareholders and repurchased $5.7 billion of its shares. For full year 2014, 3M converted 104% of net income to free cash flow for the year and generated 22% return on invested capital. The company also announced first quarter 2015 dividend per share increase of 20%. Outlook 3M affirmed its 2015 full-year guidance. The company expects earnings per share to be in the range of $8.00 to $8.30 with organic local-currency sales growth of 3% to 6% for full-year 2015. 3M also expects free cash flow conversion to be in the range of 90% to 100%. Equity Research MMM Page 5
VALUATION 3M s current trailing 12-month earnings multiple is 21.9x compared with the 26.6x average for the peer group and 18.6x for the S&P 500. Over the last five years, 3M s shares have traded in the range of 12.2x to 21.9x trailing 12-month earnings. The stock is also trading at a premium to the peer group, based on forward earnings estimates. Our long-term Neutral recommendation on the stock indicates that the company will perform in line with the broader U.S. equity market. Our target price of $172.00 or 21.1x 2015 EPS, factors this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low 3M Company (MMM) 20.1 18.3 11.0 15.7 21.9 21.9 12.2 Industry Average 24.3 15.3 10.6 11.8 26.6 108.7 10.2 S&P 500 16.2 15.1 10.7 16.1 18.6 19.4 12.0 Sumitomo Corporation (SSUMY) 145.0 5.7 18.0 4.0 7.0 8.4 5.4 Honeywell International Inc. (HON) 16.5 14.9 10.1 14.8 18.3 26.2 12.7 Icahn Enterprises, L.P. (IEP) 10.1 15.8 5.0 6.2 18.8 122.3 3.9 Danaher Corp. (DHR) 19.8 18.4 12.4 16.6 22.9 23.2 15.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B P/B P/B ROE D/E Div Yield EV/EBITDA Last Qtr. 5-Yr High 5-Yr Low Last Qtr. Last Qtr. 3M Company (MMM) 6.5 6.5 2.9 27.9 0.5 2.1 13.4 Industry Average 2.0 2.0 2.0 10.0 0.7 2.2 9.6 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research MMM Page 6
Earnings Surprise and Estimate Revision History Equity Research MMM Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MMM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform - 15.8%, Neutral - 77.2%, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Meenu Goyal Lead Analyst: Supriyo Bose Content Editor: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 & FY 14 Earnings Update Equity Research MMM Page 8