WEEKLY COMPANY INSIGHT: 3M
Robert Blews, 4 April 2019
3M is a diversified technology company and owner of several famous industrial and consumer brands including Scotch (tape, adhesives), Post-Its, and Nexcare. With operations across the globe, 3M’s business is organised into five segments: 1) Industrial (tapes, abrasives, adhesives); 2) Healthcare (medical and surgical supplies, infection prevention); 3) Safety and Graphics (personal protection, optical films); 4) Consumer (office supplies, stationary), and 5) Electronics and Energy (optically clear adhesives, connectivity materials).
The global leader in chemical and materials formulation
3M’s core competency is utilising the company’s expertise in chemicals and materials science to create new and innovative industrial and consumer products. These technologies all have one thing in common: all of 3M’s products represent a small component of its customer’s product costs but are critical to performance. As a result, customers are not particularly price sensitive as the cost of substitution is high.
3M is one of the highest quality names in our coverage universe
The company’s products have a high level of intellectual property supporting sales growth and pricing. This allows the company to generate strong and stable cash flows and earn consistently high returns on incremental capital invested in the business. We also note that management has an excellent track record of growing the business profitably while continuing to invest in the future. The sales and growth opportunities resulting from the development of new innovations remains paramount to the ongoing success of 3M.
Intellectual property = pricing power
We continue to admire the company’s ability to offset inflationary pressures via price increases. Furthermore, the potential for margins to expand in subsequent years remains, which is in stark contrast to what we have seen from many other industrial and materials companies. In our view, high quality businesses that can pass on inflationary pressures to customers are ideally positioned at this point of the cycle.
3M continues to report respectable organic growth in the midst of a downturn in global manufacturing activity and general weakness throughout the technology value chain – an impressive showing. We admire the company’s ability to offset inflationary pressures in materials and labor via price increases. Trading at a modest discount to the company’s 10-year average earnings multiple, we see some value in 3M shares at present levels.
- Slower-than-expected rate of new product development
- Weaker global economic growth
- Slower growth in emerging markets