EUR 850.00 For Business Accounts Only

Morningstar | 3M's 3Q Earnings Update

We think of 3M as a GDP-plus business. In this case, the "plus" is a testament to the value-additive nature of the company's products, churned out by its virtually inimitable research and development platform. Unlike many diversified industrials companies, 3M has committed to shared innovation, making it worth more than the sum of its parts. This commitment manifests itself in the apportionment of about 6% of net sales to R&D, which we expect to continue over the medium term. We forecast the firm to earn $8.50-$9 in gross profit for every dollar spent on R&D. Our forecast is in line with recent experience, which historically has been 57% greater than other highly innovative firms.3M also benefits from positioning its portfolio toward faster-growing portions of GDP, in terms of industry as well as geography. We think the healthcare segment will gradually take a more pivotal role in contributing to the firm’s revenue and operating income mix, particularly as the economies that 3M is geographically exposed to mature. We see this segment rising to just over 19% of the firm’s revenue by the end of our explicit forecast (from 18.5% in 2017) and nearly one third of operating income. Aside from superior profitability, healthcare benefits from several secular trends, including an aging population, rising chronic and respiratory disease and surgical procedures, and demand for efficient management of large volumes of medical data. We also expect outsize growth in the safety and graphics segment, driven by demands on aging infrastructure as the global population migrates from rural to urban areas. As such, we see the total company driving about a 4% organic top-line compound annual growth rate over 2017-22. We also see 3M slowly continuing its margin expansion story. We believe the firm will make additional inroads to preserve its competitive cost position and undertake active managerial efforts toward more efficient operations. These efforts involve increased sharing of resources, proximity to both raw materials and customers, and optimizing the firm’s massive international manufacturing footprint.