Can 3M Sustain Its Growth Momentum?

| About: 3M Company (MMM)

Founded in 1902 as Minnesota Mining and Manufacturing Company, 3M Company (NYSE:MMM) has been a reliable financial performer by all known financial metrics. The company is a conglomerate that produces a broad range of technology products and also offers services in segments that includes Industrial and Transportation, Health Care, Display and Graphics, Electro and Communications, Consumer and Office Services, and Safety, Security & Protection Services. Products such as coated and non-woven abrasives, car care products such as car shampoo, tapes, acoustic systems, filtration and energy control systems, cleaning and protection materials, roofing granules for asphalt shingles, optical film solutions for LCD electronic displays, high-performance fluids, electrical and telecoms products, and touch screens and monitors among others are being manufactured and marketed by 3M Company.

Over the years, with the exception of the quarters during the economic meltdown, 3M's earnings from its industrial sector have been tremendous compared to its peers like General Electric (NYSE:GE), Siemens (SI), and Honeywell (NYSE:HON). Also, over the years, the stock of 3M has been in upward momentum in response to its impressive earnings thereby yielding great returns to its long-term shareholders. In fact, 3M has consistently increased dividend payouts to shareholders on an annual basis in the last 55 years. Also, the company's operating margins, which shows how much it earns per dollar of sales and how much it has on account for servicing some costs like interest on debts, have been on the increase and well above 20% in the last five years. While 3M continues to report impressive quarterly results, analysts have long been concerned about the need for the company to grow its earnings faster in order to keep exciting the investing public. A bit of research I undertook shows that 3M is able to continue to sustain its impressive free cash flow and also improve shareholder value into the foreseeable future. Here are my findings:

2 Key Catalysts for 3M's Future Growth

Strategic Acquisitions

In the history of 3M Company, strategic acquisitions of companies that add value to its existing line of business have been a major source of strength for improving the company's free cash flow and profitability. On November 28, 2012, 3M completed the acquisition of Ceradyne; a company that specializes in manufacturing advanced ceramic products suitable for use in devices specially designed for automobiles, oil and gas, and tools used for defense or security purposes like helmets and bulletproof wears. Ceradyne is strategic for growing earnings for the industrial business of 3M Company. In September of 2013 alone, Ceradyne secured two separate contracts that totaled $231 million from the U.S. government for the supply of helmets and body armor for the use of the men and officers of the U.S. military. Specifically, the contract for supply of 77,000 helmets was awarded for the sum of $80 million while the contract for the supply of body armor was awarded to the company for $151 million.

Recently, 3M's CEO, Inge Thulin, announced on CNBC that the company will henceforth be spending between $1 billion to $2 billion on an annual basis for strategic acquisitions in the following words: "Our plan is to spend $1 billion to $2 billion on an annual basis on acquisitions, and we are laying that plan out and we have a good hopper, which is broad-based for all the five business groups in terms of where we would like to go for the future.''

If 3M keeps to its plan of making strategic acquisitions on a yearly basis, investors should expect the company's earnings, free cash flow and operational profits to continue to grow from quarter to quarter.

Improved Investment in Research and Development

Another catalyst that could continue to improve the quarterly earnings and profitability of 3M is the improved investment the company has been making in its research and development drive. According to Inge Thulin, 3M has planned to increase its annual investment in R&D from 5% to 6% by 2017. The CEO confirmed the importance of the company's investment in R&D in the following words: "I believe that what is driving this company in terms of return for us is the investment in research and development, and every time we do it we know that we have a competitive advantage.''

With about 55,000 innovative products in its portfolio and still counting, R&D has been 3M's best strategy for improving its revenues and margins from its industrial operations. Besides, a greater part of 3M's quarterly revenues are now being recorded from the sales of the company's relatively new products brought on by its innovative R&D.

3M's Evaluation and Outlook

3M posted its third quarter results on October 24, 2013, with its revenues seeing an increase of 5.6% in comparison with the revenues it reported a year ago. 34.17% of 3M's total revenues for the quarter were generated from its industrial operations and the revenues came in with an increase of 8.6% when compared with the value a year ago. Ceradyne accounted for 4.1% of the 8.6% increase recorded during the quarter meaning that investors can expect 3M to report higher revenues from the company's industrial operations next quarter particularly with its subsisting contracts with the U.S. government.

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.