WEEKLY COMPANY INSIGHT: 3M
Robert Blews, 11 December 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. When you drill down into the company’s reportable segments you find that the company has a handful of key technologies which it leverages across various end markets. Key technologies include but are by no means limited to: adhesives and sealants, films, tapes, fasteners, advanced materials, and safety and protection 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. To this end, spending on research and development is currently ~ 6% of sales, a level almost unheard of for a businesses that doesn't operate in either technology or pharmaceuticals.
Intellectual property = pricing power
We continue to admire the company’s ability to offset inflationary pressures via price increases. Management’s plan to expand operating margins by 1% in 2019 is truly incredible in light of the broader inflationary pressures that exist within the global manufacturing value chain.
Organic revenue growth remains challenged by a slowdown in global manufacturing activity, but management is proactively working to streamline operations and reduce costs. We view recent softness as macro driven, rather than indicative any issues relating to the company’s products or positioning.
- Slower-than-expected rate of new product development
- Weaker global economic growth
- Slower growth in emerging markets