EUR 850.00 For Business Accounts Only

Morningstar | 3M's PFAS Exposure, While Considerable, Doesn't Frighten Us Away from its Long-Term Prospects

We think of 3M as a GDP-plus business. In 3M’s 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 leveraging innovation across its disparate businesses, making it worth more than the sum of its parts. This commitment manifests itself in the apportionment of just under 6% of net sales to R&D, which we expect to increase toward 6% by 2023. We forecast the firm will earn just under $9 in gross profit for every dollar spent on R&D. Our forecast is relatively in line with recent experience, which historically has been significantly greater than other highly innovative firms.3M also benefits from positioning its portfolio toward faster-growing portions of GDP, both 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 a larger portion of the firm’s re-segmented revenue by the end of our explicit forecast. Aside from superior profitability, healthcare benefits from several secular trends, including an aging population, rising chronic disease and surgical procedures, as well as demand for efficient management of large volumes of medical data. 3M's acquisition of Acelity, while slightly pricey, should also provide the firm with a stronger footing in the advanced wound care market. We also expect outsize growth in 3M's safety portfolio, driven by the need to replace aging infrastructure and increased urbanization in the developing world. Therefore, we model about a 4% top-line compound annual growth rate over 2018-23.We also see 3M slowly continuing its margin expansion story in tandem with its 2019 restructuring efforts. We expect these efforts will involve increased sharing of resources, cutting raw material costs, reducing global headcount by 2,000 positions, and optimizing the firm’s massive international manufacturing footprint, among other initiatives.