- Quick Take
- 3M’s profits increased marginally in the first quarter driven by increased healthcare sales from the emerging regions partially offset by a decline in sales of optical films used in consumer electronic devices.
- The company also raised its capital spending and research and development investments in the first quarter to help increase its market presence in the growth markets.
- However, the low global growth environment aggravated by weakness in some markets forced 3M to cut its earnings outlook for 2013.
3M‘s (NYSE:MMM) first-quarter sales and profits increased marginally on a year-over-year basis driven by growth from the emerging economies of Latin America and Asia-Pacific offset in part by a decline from Europe. Sales of the industrial conglomerate increased across all its segments except electronics where sales declined due to lower demand for optical films used in consumer electronics like televisions, monitors, notebooks and tablets. The sales growth of the company was also impacted from a weaker Japanese yen, which yielded fewer dollars on currency translation.
Additionally, taking the current weak global economic growth environment and softness in some end markets like electronics in to account, 3M lowered its earnings outlook for 2013. The company now expects its 2013 earnings to lie in the range of $6.60-$6.85 per share, down from its prior guidance of $6.70-$6.95 per share [3M’s first-quarter earnings, Form 8-K, April 25 2013, www.3m.com]. This compares to its earnings of $6.32 per share in 2012 [Fourth-quarter and full-year 2012 earning results – Form 8-K, January 24 2013, www.3m.com]. However, the company still expects its organic sales to grow between 2% and 5% in 2013 in local currency terms.
We currently have a stock price estimate of $110 for 3M, approximately 5% above its current market price.
Healthcare And Industrial Segments Drive Growth
In the first quarter, 3M’s sales from its healthcare segment increased by 4% y-o-y driven by rising healthcare spending from the developing countries. Healthcare sales from Latin America rose in double-digits with positive sales growth across all other major geographies. 3M sells medical and surgical supplies, skin infection prevention products, dental products and health information systems in this sector.
3M’s sales from its industrial segment, which makes adhesives, abrasives, tapes and other materials for aircraft and car manufacturers among others, also increased in the first quarter.
Geographically, organic sales growth was led by Latin America where sales increased by over 7% y-o-y in the first quarter. This region was followed by moderate sales growth from Asia-Pacific and the U.S. While sales from Europe, the Middle East and Africa (EMEA) declined by around 1% y-o-y.
Overall, 3M’s sales increased by 2% y-o-y to $7.6 billion in the first quarter.
Investments In Innovation And Manufacturing Capacity Rise
3M also raised its capital investments to $324 million in the first quarter from $261 million in prior the year period. The company has been focusing on expanding its manufacturing facilities in the fast-growing markets of Latin America and Asia to increase its presence in these markets.
In addition, 3M’s research and development spending as a percentage of its revenues increased marginally to 5.6% in the first quarter from 5.5% in the year ago period. The company anticipates to raise its research spending to 6% of its revenues by 2017 [3M’s presentation at Bank of America Merrill Lynch Global Industrial & EU Autos Conference, March 21 2013, www.3m.com]. This will help it to maintain the proportion of new product sales, which bring premium returns in its total sales.
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