Sunday, February 27, 2011

Heartland Tech Titan (MMM)

From Barron's:

3M's innovation machine launched 1,300 products last year. With sales and profits rising and the company's footprint in emerging markets growing, the stock looks like a buy.
Think that the axis of American ingenuity lies squarely in sun-drenched California? Think again, and direct your gaze at an unremarkable corporate park in the icy reaches of Minnesota.

This is the home of 3M, and people around the world interact daily with its products—from fiddling with Scotch tape, to leaving urgent messages on Post-its, to parking their posteriors on Scotchgarded furniture. Last year, Booz & Co., the consultant, named 3M the third most innovative company in America, after Apple (ticker: AAPL) and Google (GOOG). On any given day, you can find 3M's inventors working on such products as ultra-skinny panels for solar cells, or anti-microbial touch screens that let your fingers dodge co-workers' germs. Yet while shares of Apple have soared since the market bottomed in March 2009, 3M's stock (MMM) has crawled ahead. Last year, it climbed 7%, about half the S&P 500's gain. That's about to change. Shares of the former Minnesota Mining and Manufacturing Co. are entering a sweet spot, thanks to a blizzard of new products and the rising popularity of 3M's wares outside the U.S. Over the next several years, 3M brass say, sustainable top-line growth will double, to 7% to 8% a year. If that prediction is correct, annual earnings probably would rise at least 60% over the next five years, boosting the stock commensurately.

Given this scenario -- which seems very plausible -- 3M shares look tremendously appealing. Robert Hagstrom, who runs the Legg Mason Capital Management Growth Trust, counts 3M among his largest holdings. "It has a clean balance sheet, it's a multinational, and megacaps are without a doubt the cheapest part of the market," says the money manager, who has been adding to his stake lately. Hagstrom, who is the author of The Warren Buffett Portfolio, believes that the company, especially at its current price, has many attributes of a classic Buffett selection.

Last year, 3M made $4.1 billion, or $5.63 a share, on $26.7 billion in revenue. The earnings blew past the guidance the company had provided early in the year, when the economic outlook was cloudy, and were well above the depressed level of 2009, when the big manufacturer earned $3.2 billion, or $4.52 a share. For the current year, 3M is forecasting 5.5% to 7.5% internal revenue growth and earnings of $5.95 to $6.20 a share, after pension expenses. (Without them, the range is $6.17 to $6.42.) Management contends that 20%-plus operating margins are doable over the next several years, which would be an industry-leading level. The robust sales forecast reflects the company's success at refreshing a stale product line over the past few years, improving productivity and rationalizing capacity.

The main hand behind the revival is that of CEO George Buckley, who took the helm in 2005, after having worked at powerboat maker Brunswick. Even in the Great Recession, Buckley pushed to boost sales abroad, do more research and manufacturing outside the U.S. and broaden 3M's product lines, without staunching its lifeblood -- research and development. The holder of 16 patents himself, he was an excellent candidate to head a company whose stock in trade is innovation.

ON A SUB-ZERO DAY this month, the Minnesota roads are crunchy with salt, and the 3M campus in St. Paul is mercilessly icy. Inside, Buckley is fighting a cold. Still, he's peppy. The company has just raised its dividend for the 53rd consecutive year and announced a major stock buyback, and Buckley seems confident that strong sales growth is sustainable, despite 3M's size. "If the law of averages takes over, how do you break that pattern?" he asks, rhetorically. "You find a way to create pockets of growth within the 3% [growth] market that are growing at 6% or 7%. You do that through innovation, through the creation of new markets, by expansion geographically."

For all that 3M is known for Scotch tape and Post-its (a boyfriend famously breaks up with a Sex and the City heroine via Post-it), it derives about a third of its revenue from industrial and transportation products, such as car waxes and abrasives.

The company's second-largest unit, at just under 20% of sales, is health care, whose wares include inhalers and orthodontic devices, including Incognito "invisible" braces for teeth. The health-care business is growing swiftly, and its earnings growth stacks up nicely against that of rivals like Smith & Nephew (SNN) and Covidien (COV).

The consumer and office division, which houses Post-its and consumer tapes, accounts for less than 15% of corporate revenue, but it is expanding nicely, too. So is the display and graphics unit, which makes reflective signage for highways, enormous graphic film for advertising, plus films that boost the brightness of electronic-device displays.

3M also is involved in safety, security and protection (which includes security systems and face masks). It also has an electro and communications unit that sells clear adhesives, high-capacity cables and flexible circuits for printers.

Last year, 3M spent about $1.43 billion -- 5% of sales -- on R&D, the highest percentage among its peers, except for Danaher. It has 35 international labs, and 7,500 of its 80,000 workers are in R&D. In 2010, it won 2,400 patents and launched 1,300 products. Today, about 31% of revenue comes from new products, up from 21% five years ago. The goal: 40% by 2015....MUCH MORE
How 3M Got Its (Innovation) Groove Back (MMM)