Seeking Alpha
Long only, value, momentum, research analyst
Profile| Send Message| ()  

3M (MMM) showed strong improvement in the safety and graphics segment with sales growth of 7% year over year in Asia-Pacific. In the third quarter this year, it generated $1.4 billion in revenue and $315 million in operating income from its safety and graphics segment. Under this segment, 3M manufactures optical films that have multiple uses. The company's optical films are used in manufacturing televisions, smartphones, tablets, and notebooks. Companies like Sony (SNE) and Apple (AAPL) use this technology in their liquid crystal display panels, or LCDs. This fiscal year Sony expects its TV shipments in Asia to be around 16 million units and smartphone shipments are expected to be around 65 million units during its 2014 fiscal year.

Last year, due to an energy-saving subsidy program in Asia-Pacific, LCD television sales were restricted within the 32-inches television segment to reduce household utilities since this segment of television's electricity consumption is 70 watts. To increase LCD sales in the 50-inch segment and smart televisions, Sony decided to focus on its electricity consumption per television. Generally, a 50-inch LCD television consumes up to 150 watts of electricity. So, Sony used 3M optical film to help reduce the electricity consumption. The optical film can save 37% more on electricity consumption. Using this technology, Sony's 50-inch and smart LCD televisions will qualify under the energy-saving subsidy program.

Moreover, after the Golden week, a semiannual seven day national holiday period in Asia, LCD television inventories decreased, and television vendors will purchase more television units to refill the inventory for the New Year. So, LCD television manufacturing companies, including Sony, will witness a growth in television shipments. I expect future shipments will contribute to 3M's Safety and Graphics segment revenue in the coming quarter.

Apart from Sony, Apple uses 3M's Quantum Dot Enhancement Film, or QDEF. This technology increases the color experience by 50%. Apple has sold around 2.3 million iPhones in China. The iPhone accounted for 38% of smartphone sales in China in the second quarter this year. As Apple uses 3M's QDEF Technology in the iPhones, I believe increasing sales of Apple iPhones will directly increase the sales of 3M's QDEF technology by the end of the year 2013. Apart from China, Apple has sold 33.4 million iPhones worldwide and the company reported $37.5 billion in revenue in the fourth quarter. Apple expects its revenue for the first quarter of 2014 will be between $55 billion to $58 billion. With the growing shipments and orders of these companies' products in emerging market, 3M is expected to strengthen this segment's top line in coming quarters.

Stationary growth continues

3M decided to partner with Shenzhen Comix Stationery Co. Ltd to acquire the Chinese stationary market share. The market capacity of the Chinese stationary industry is about $21.5 billion, and it accounted for 8.6% of the total global stationary market. The partnership with Shenzhen Comix enables 3M to penetrate the Chinese local stationary market with its marketing and distributing efforts.

Comix distributes its products to more than 60,000 stationary retailers covering around 500 cities. The Chinese stationary market leader will distribute 3M products like print labels, sealing tape, etc. until December 31, 2015, and the minimum purchasing value would be $7.05 million.

In the third quarter, 3M's consumer segment reported $1.2 billion revenue, up 2.1% year over year and was attributable to consumer stationery and office supplies, and consumer health care. I think 3M will achieve continuous growth in the consumer segment in the next few years with its increased local organic sales of 4% in this segment.

Conclusion:

3M has determined its growth strategy through its diversified industrial products, especially in the safety and graphics segment. Despite decreased sales in the second quarter this year due to weak sales in European region and the slow economic condition, 3M showed a comeback in the third quarter. With its new strategic partnership with the Chinese stationery leader, it continues its growth in the consumer segment.

Moreover, 3M revised its share buyback program to $3.5 billion-$4.5 billion from $2 billion-$3 billion in this year, which will result in earnings per share, or EPS, growth of 1% to 2% by next year. The company's share buyback program and new opportunities in the developing region certainly make me recommend investors go for a long-term position and expect a good return.

Source: 3M: Emerging Markets Is The Focus