The price of 3M (NYSE:MMM) has appreciated by 11.70% since the start of the year. The upward movement was supported by a number of factors including the impressive earnings growth (6% during 2012). In addition, first-quarter results have shown a marked improvement over the first quarter of 2012. Inge Thulin, the Chief Executive Officer of 3M, took office last year and he has been involved in a thorough process of restructuring the company, one that he intends to continue in the future.
3M is a conglomerate operating in a diversified technology industry. Its extensive product portfolio is made up of business activities, which are divided into industrial, safety & graphics, healthcare, electronics & energy and consumer segments. The Minnesota-based organization was incorporated in 1992. In 2011, the company completed its acquisitions of Alpha Beta Enterprise, a tape manufacturing company, and Hybrivet Systems, an instant read product provider. These were only two of many acquisitions pursued by 3M in order to expand its operations and improve its position in the market.
Efforts to Maintain Profitable Growth: How affective have they been?
The company's aim to project profitable growth has been reflected in its financial performance in the past years. Average annual capital expenditures for the past six years are approximately $1.3 billion. Consequently, the total assets of the company have demonstrated a CAGR of approximately 6.5% since 2007. This growth has resulted in the sustenance of per share earnings above $4.5 throughout this period. This profitable growth has also occurred alongside efficient management of capital. The debt portion of the total capital has been decreased from approximately 40% in 2008, to 25% in 2012, thereby reducing the financial risk of the company.
In the first quarter of the current year, the company's revenues increased by 2% year-over-year to $7.6 billion. The improvement mainly came from the industrial segment, the largest source of the company's revenues, as the sales for this segment increased by 4.6%. Earnings per share also improved by 1.3% as compared to the first quarter of 2012, as the company reported earnings of $1.61 per share. In the face of a difficult economic scenario, the company managed to maintain its operating margin of approximately 21%. However, the outlook has disappointed as the company reduced the estimates to $5.60-$6.85 per share from $6.70-$6.95 per share. As a result, the stock price came down by about 4%. Poor economic conditions are taking their toll on most of the industrial manufacturers; however, the long-term prospects of the company remain strong.
Market Position: What can Investors take away from it?
The company's persistence in pursuing growth has resulted in a very aggressive corporate strategy. 3M maintains its market share by using its industrial muscle in segments with stronger competitive advantages. The expenditure on research and development has averaged $5.5 million for the past six years. This expenditure is exclusively focused on identifying technology segments with substantial advantage and considerable margins. Furthermore, the company operates in over 65 countries with more than two-thirds of revenues coming from outside of the U.S. This means that the company is largely diversified across regions and segments of business activities.
3M has also made significant efforts to return cash to its shareholders - the company has improved its annual dividends by 8% resulting in a dividend yield of approximately 2.4%. This is the 55th consecutive increase in per share dividends by the company. This shows the consideration of the company towards the interests of its shareholders. The company has also decided to return capital to investors by pursuing a buy-back plan. Moreover, the usual problem that occurs when a company aims to aggressively grow its boundaries is that of capital management. 3M on the other hand has managed its capital efficiently. It is rated Aa2 by Moody's with a stable outlook projecting a strong financial position of the company.
The growth period has just begun as Thulin is likely to further the efforts by pursuing strategic acquisitions. The number of acquisitions will start to decrease eventually, but the strategic nature aimed at aggressive growth is expected to remain a constant in the company's strategy. Therefore, the balanced approach towards the company's financial management, coupled with robust growth prospects and decent dividend yield, is expected to translate into a commendable appreciation in the company's stock price. The long-term growth prospects of this giant make it a buy, in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.