Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of 3M Co (MMM) hardly moved on the back of a solid third quarter earnings report which came in line with the company's long term guidance.

3M's continued focus on innovation, through large R&D investments pays off in terms of organic sales growth and high margins, continuing to support the share price.

After solid momentum so far this year, most of the immediate upside potential has already materialized. Still, shares offer long term appeal.

Third Quarter Results

3M generated third quarter revenues of $7.92 billion, up 5.6% on the year before, and easily beating consensus estimates at $7.85 billion.

Net earnings rose by 5.5% to $1.24 billion. Diluted earnings per share rose by 7.9% to $1.75 per share, in line with consensus estimates.

CEO and Chairman Inge Thulin commented on the performance over the past quarter, "The 3M team delivered another strong performance in the third quarter. All business groups generated positive organic sales growth and operating margins above 20 percent. At the same time, we further strengthened the company through increased investments in innovation, commercialization and manufacturing."

Looking Into The Results..

3M reported solid revenue growth driven by organic sales which rose by 5.8%, of which 1.0% was driven by pricing. Acquisitions added 1.5% in revenue growth, offset by currency headwinds which shaved off 1.7% in revenues.

Organic sales growth was notably strong in the safety and graphics business, coming in at 8.1%. The consumer, and Electronic and Energy business were the laggards, still reporting growth of 4.2% and 3.8%, respectively. Note that industrial revenues rose on the back of the $860 million acquisition of Ceradyne announced in October of last year.

Growth was driven by the Latin America business, growing at a rate of 10.5%. The US and wider European region reported 4.5% and 4.3% growth, respectively.

All in all, gross margins managed to jump by nearly 10 basis points to 47.6% of revenues. Operating earnings fell by 40 basis points to 22.0% of total revenues, notably on the back of higher selling, general & administrative expenses. Net income rose on the back of higher sales and lower taxes, with earnings per share seeing an extra boost after 3M repurchased nearly 2% of its shares outstanding over the past year.

.. And Looking Ahead

Earnings for the full year of 2013 are now seen between $6.65 and $6.75 per share, compared to a previous guidance of $6.60-$6.85 per share. On average, analysts were looking for earnings of $6.70 per share.

Full year organic sales are seen up between 3-4%, narrowed from a previously guided 2-5% growth. Free cash flow conversion is seen around 90%.

Valuation

3M ended its third quarter with $3.31 billion in cash, equivalents and marketable securities. Total debt stands at $5.78 billion for a modest net debt position of around $2.5 billion.

Revenues for the first nine months of the year came in at $23.30 billion, up 3.5% on the year before. Earnings rose by 3.0% to $3.56 billion. Annual revenues could come in around $31 billion as earnings should come in around $4.6 billion.

Trading around $123 per share, the market values 3M at $83 billion. This values the company at 2.7 times annual revenues and 18 times annual earnings.

3M currently pays a quarterly dividend of $0.635 per share, for an annual dividend yield of 2.1%.

Some Historical Perspective

Long term holders in 3M have seen excellent returns, notably in recent years. Shares traded around $80 per share in 2004, to fall to lows of $40 in 2009. Shares tripled to fresh all time highs around $124 per share at the moment.

Underlying these returns is solid and profitable growth. Revenues rose by a cumulative 29% to $29.9 billion. Earnings rose by some 39% in the meantime to $4.4 billion.

Investment Thesis

3M is well-known for its innovation capabilities which results in the fact that the company generates a large portion of its revenues from products being introduced in recent years. On top of that, it leads to very high operating margins across all of its divisions.

3M is finally seeing growth across all of its business units again, after the electronics and energy business posted declines in the past two quarters. CEO Thulin noted that 3M had an excellent quarter as the business continued to grow in a profitable way.

So far this year, 3M has already returned $4.8 billion through dividends and share repurchases in the first nine months of the year, putting the company on track to return over $6 billion in cash to its shareholders, returning cash at a rate of 7% per annum.

Back in December of last year, I last took a look at 3M's prospects. At the time, 3M was issuing a roadmap projecting 9-11% earnings per share growth in the coming 5 years, based on organic sales growth of 4 to 6% per annum. Back in December shares were trading in their low nineties, as the company was temporarily reporting results falling short of the long term plan.

Yet the company sticks to the long term plan guiding for solid earnings growth quite some time ahead, providing a solid foundation below 3M's share price. An 18 times earnings valuation is not very cheap anymore, but solid cash flows to investors through repurchases and dividends, combined with the guided roadmap for earnings per share growth will continue to support the 3M's share price.

As such 3M continues to be a nice investment in any well-diversified portfolio in search for dividends and capital gains. Don't expect spectacular capital gains anymore after shares have already witnessed year to date gains of 34%.

Source: MMM - Relentless Focus On R&D Continues To Pay Off