3M Co. (NYSE:MMM) is a diversified industrial company which recently started offering a library cloud service. The product integrates 3M hardware capability with a cloud offering allowing library patrons to borrow wirelessly, directly from their smart device, browse books, and access to Polaris integrated library system. I think this represents a large growth opportunity for 3M, which can also benefit libraries and patrons. The company has a proven growth record and ability to innovate and bring new products to market with success. It is increasing capital spending in developing markets such as China, and Brazil, which will further help growth. In addition, the shares, while not cheap, offer capital appreciation and a stable and rising dividend of $2.36 per year.
The Library Cloud
There are over 13,000 public and higher-education academic libraries in the United States alone. This figure excludes private schools, government, military, and specialized libraries. At the same time, libraries are undergoing a tremendous shift to offering more automated services and electronic materials to their patrons. This enables librarians to focus more on patron-related activities than simply re-stocking and checking out materials.
3M has been offering library related hardware for years, including security and self-checkout systems. I still remember when going to a library required the librarian to browse through a thousand of cards before I was able to borrow a single book. 3M's recent entry into library cloud service makes sense and I think this turnkey solution will be an important growth engine for the company in the coming years. 3M together with its partners (OverDrive, Polaris, and publishers), should be able to integrate its hardware capabilities with a cloud offering. Importantly, 3M already has developed relationships with many libraries and it should be able to build its new product on these relationships.
Specific numbers for the 3M library cloud service are not available but The Digital Reader posted rumors that it will cost a library about $30,000 per year. Assuming a profit margin of 20% and that 50% of libraries (6,500) sign up, this will be $39 million of additional net income per year only in the United States. In addition, 3M will be able to sell its own hardware and could find additional revenue streams from this new venture.
3M has a unique position to offer hardware together with its cloud service. Even if the libraries in the future are entirely digital, I believe that there will still be physical buildings for additional services such as live events, book signings, toddler times, and movie screenings. Since most libraries are paid for by the real estate taxes that residents pay, 3M does not have to worry about such things as accounts receivables, consumer confidence, unemployment, companies' cost controls, and the Federal government decreasing subsidies.
The library cloud service offered by 3M is currently being tested in several libraries around the country including a library in Darien, CT, around four kilometers from where I live. This is a list of additional libraries testing the 3M system: Glendale and Pasadena public libraries in CA, the St Paul Library System, the Bergen County Cooperative Library System, NJ; Maricopa County Library District, Ariz.; Douglas County Libraries, Colo.; Richland County Public Library, S.C.; and the State Library of Kansas on behalf of the Kansas Digital Library Consortium.
While the library cloud project is in its early stages, it seems likely that it will be adopted by other libraries and that 3M could be the major company providing cloud and related hardware equipment to libraries in the U.S. and abroad. 3M has already signed with 25 publishers and its library cloud offers over 100,000 titles.
The competition is still behind 3M and its partners. Amazon.com (NASDAQ:AMZN) offers a book lending service to its prime service members but I find most of the titles unappealing, the service is not free, and you can borrow one book a month. Also, Amazon sells books and other content and it actually competes with libraries. There are a number of web sites that enable book lending but they are either not free or have few users.
3M stock currently trades at a price-to-earnings ratio of 14 and pays a quarterly dividend of $0.59 per share for a dividend yield of 2.7%. This is not a cheap valuation but not expensive either. The company is often compared with another conglomerate, General Electric (NYSE:GE). I think 3M is a better investment as its products are more value oriented - they allow customers to make things better. Also, General Electric is currently regulated by the Federal reserve because it has a large financial related operation. In time of economic hardship, GE's financial operations are more of a liability than an asset. For example, in 2009, after the financial crisis, 3M's sales fell by 8.4% compared with 2008 while GE's sales declined by over 14% during the same period.
In addition, during the first quarter of 2012, 3M's sales in recession stricken Europe were virtually unchanged. A number of GE segments experienced declines in sales and income in the old world during the first quarter of 2012, including healthcare sales (-6%), services revenue (-4%), commercial and lending income (-35%), and lightning. GE does not report its quarterly results by region, but its exposure to Europe appears to be affected more severely than that of 3M. For the entire 2011, 3M reported a revenue increase of 23.9% in its Europe, Middle East and Africa segment compared with a decline of 2.7% for GE in the same period and regions.
The cloud area is crowded. A number of companies including Google (NASDAQ:GOOG), Oracle (NYSE:ORCL), and Microsoft (NASDAQ:MSFT) offer their own clouds to consumers and businesses. I think in this particular situation, 3M has a head start despite being known more as an industrial company rather than a software company. Although it is still too early to quantify the success of 3M's library cloud, the saying goes that the early bird gets the worm and 3M has already established relationships with libraries. Given the company's track record of bringing innovative products successfully to market, its stable dividend, and relatively inexpensive stock, I recommend investors consider 3M stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.