The 3M Company (NYSE:MMM), a global diversified technology company, serves various industries. The company concluded its FY 2013 by beating analysts' earnings estimates but fell short on consensus estimates for revenue. Therefore, I will determine the performance of the weakest revenue driving segments of the company in this article. I will also consider the future outlook of the key revenue drivers of those segments considering the forecasts of the industries in which they operate.
Two Major Revenue Driving Segments of the Company
The company operates through its six business segments: industrial and transportation; health care; consumer and office; safety, security and protection services; display and graphics; and electro and communications till the end of FY 2012. Since the beginning of FY 2013, the company restructured its segments for the effective execution of its strategy of building relevance and presence in the marketplace. As a result the company now operates five segments: consumer; industrial; health care; safety and graphics; and electronics and energy. The revenue contribution and performance of each of these five segments is outlined in the table below.
The table above shows that the company's electronic and energy segment has been underperforming with respect to the segment's net sales growth. The segment has recorded a 4.8% and 1.2% decline in its net sales in FY 2012 and FY 2013 in comparison to the previous fiscal years. As a result, the segment's contribution to the company's total net sales declined from 19.1% in FY 2011 to 17.2% in FY 2013.
The second segment of the company that I will analyze in this article is the company's safety and graphics segment that was the second largest contributor to the company's total net sales in FY 2013. The segment also recorded a decline in its contribution to the company's total net sales declining from 18.2% in FY 2011 to 18% in FY 2013.
After the realignment of the company's segments that was conducted at the beginning of FY 2013 the company's electronics and energy segment includes communication markets, electrical markets, electronics markets materials, electronic solutions, infrastructure protection, optical systems, renewable energy, and 3M touch systems. This new business segment also reflects the movement of certain product lines between various divisions. The company predicts 3-7% organic local currency sales growth for this segment from 2013-2017.
The company's safety and graphics business segment includes architectural markets, building and commercial services, commercial graphics, industrial mineral products, personal safety, and traffic safety and security. This new business segment also reflects the movement of certain product lines between various divisions. The company predicts 4-6% organic local currency sales growth for this segment from 2013-2017.
After an overview of the position and performance of the two selected segments for FY 2011 to FY 2013, let us determine what the revenue drivers within these segments are. Afterwards I will also determine the future outlook of those drivers to determine the improvement in the performance of these segments for the coming years.
Electronics and Energy Segment Revenue Drivers and their Forecasts
Source: 3M Company 2014 Outlook Meeting
The pie charts above state that the company's electronics and energy segment generated 29% of its segment net sales from optical systems in FY 2013. So, the optical systems market is the major revenue driver for this segment. The second main revenue driver for this segment is electrical markets that generated 23% of the segment's total revenue in FY 2013. Combined, both of these markets generated 52% of the segment's total net sales in FY 2013. Therefore, I will determine the outlook of these markets for the segment and their impact on the company's performance as a whole.
Geographically, the segment generated 62% of its total net sales from the APAC region in FY 2013. Consequently, I will focus on the outlook of the two major revenue contributing markets that I identified in the preceding paragraph for only the APAC region.
APAC Optical Systems Market
According to ElectroniCast Consultants, the market for devices used in commercial free-space optical communication systems will almost double until 2018. APAC will be the fastest growing region for this market and is forecasted to record a rapid growth of 19% from 2012-2018. Within the region, Australia, China and India will have more room for utilization of this technology. TechNavio's analysts forecast the Passive Optical Network Equipment market in the APAC region to grow at a CAGR of 32.4% from 2012-2016. One of the prime factors driving this market growth is the rising growth of PON equipment in China. The Passive Optical Network Equipment market in the APAC region has also been experiencing the advancement of optical network architecture. The dealers in various Asian countries such as China and India are implementing passive optical network solutions for their fiber-optic infrastructure at a rapid pace guaranteeing vigorous future growth of the Passive Optical Network Equipment Market in the APAC Region.
APAC Electrical Market
In 2012, Asia-Pacific accounted for 40.9% of the global electrical equipment market value. The market is further forecasted to accelerate with a projected CAGR of 4.7% for the five-year period from 2012-2017. This is likely to drive the market to a value of $308 billion by the end of 2017. The Asia-Pacific market for electrical equipment for marine and offshore solutions is also expected to grow from a net worth of $350 million in the year 2012 to $467.5 million in terms of revenue by the year 2017. The power industry in the APAC region is striving to increase its capacity which in turn will make cause an increase in investments in electrical equipment. As a result, the industry will receive a boost in the region.
Safety and Graphics Segment Revenue Drivers and their Forecasts
Source: 3M Company 2014 Outlook Meeting
The pie charts above show that the company's safety and graphics segment generated 40% of its total net sales from personal safety in FY 2013. As a result, I will determine the future outlook of this market along with the traffic safety and security systems market for the company and its safety and graphics segment.
The U.S. was the major contributor to the net sales of this segment contributing 35% of the total net sales generated by the segment in FY 2013. Hence, my analysis will focus on the outlook of the U.S. personal safety and traffic safety and security systems industry.
U.S. Personal Safety, Safety, and Security Markets
The U.S. personal protective equipment market is worth $2 billion after growing by 2.1% annually from 2008-2012. The market is expected to expand rapidly till the year 2017 and the equipment manufacturers in the market will record revenue growth. IBISWorld has added a report on the safety equipment and supplies distributors industry to its growing industry report collection. Revenue performance for the industry remains dependent upon two extensive but well-defined downstream markets: manufacturing and construction. These sectors demand a wide range of safety equipment and supplies. The U.S. economic recovery will be a driver of the growth of these industries in the coming years. MarketsandMarkets estimates the global transportation safety and transportation security market to grow from $37.80 billion in 2013 to $62.96 billion in 2018 at a CAGR of 10.7% from 2013 to 2018. North America is expected to be the largest contributor in terms of revenue contribution for this growth in the global transportation safety and security market.
Analysts' ratings and my conclusion
Various analysts have recently assessed MMM shares. Analysts at Zacks restated a "neutral" rating on shares of 3M in a research note on Tuesday, February 4th. They now have a $134.00 price target on the company's stock while the stock is currently trading at around $131. The analysts at Deutsche Bank have a $140.00 price target on shares of 3M. Overall, the company has a consensus rating of "hold" and a consensus target price of $138.46.
According to my analysis, two weak performing revenue contributing segments of the company have a positive outlook as per industry growth forecasts. As a result the two segments that hurt the company's top line in FY 2013 will recover and start contributing positively to the company's top line in the coming years. Therefore the company is likely to achieve its positive revenue growth targets for both of these segments in the coming years. The company and its investors will benefit from the company's top line growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article