Diversification in a Share
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most people have more experience with 3M Co. (NYSE: MMM) than they realize. While the company is well know for Post-It notes and Scotch Tape, they also operate multiple other divisions. For investors looking for diversification in one company, 3M is a good choice. The company has operations spanning health care, the industrial and transportation industries, communications, graphics, and more. The company is also one of a handful to increase its dividend for over 50 years straight. The company's recent earnings report gives us a chance to look behind the scenes at this remarkable conglomerate.
The Largest Division:
Since 3M reports in multiple divisions, let's look at each quickly and see how things are going. The company's largest division is their Industrial and Transportation unit. While overall sales were down 0.6%, in local currency they increased 4.2%. Again, the company saw good sales growth everywhere except Europe, and managed costs to improve income by 13%. To answer the question of whether the economy is recovering, investors need only to look at the industrial and transportation segments of multiple businesses. Since industrial production and transportation growth usually portend economic growth, there are some very clear signs that things are getting better.
Not only did 3M report some of the strongest organic growth in this division, but this mirrors the growth driver analysts are looking at with both 3M and competitor General Electric (NYSE: GE). Both companies are heavily involved in both industrial production and transportation. In GE's most recent earnings, the company saw impressive growth in their transportation segment with revenue up 27% and profits up 58%. In addition, analysts expect that industrial and transportation strength will lead to stronger earnings growth for both companies in the future. 3M is expected to grow earnings by nearly 10%, and GE is expected to grow earnings by over 12% for the next few years. Given the size of each company, this type of growth will only occur with further strength in the economy.
The company's Health Care division serves as a good proxy for the rest of the company. In local currency the company saw good organic growth, but because of foreign currency adjustments, overall sales looked weak. This division saw local currency sales up 5.4%, but reported sales up just 1.1%. With $1.3 billion in sales, this is the company's second largest division. What was impressive is the company saw double-digit sales growth in Latin America, Canada, and Asia-Pacific. Since 3M is a master at operating efficiency, the company turned this just 1.1% sales growth in to an increase of 13.4% in operating income. Another consistent trend across the company, strong sales in Latin America, Canada, Asia-Pacific, and the U.S. were offset by weak results in Europe, The Middle East, and Africa.
Consumer & Safety and Protection Services:
While the two divisions don't appear related, the results in 3M's Consumer Office division and Safety, Security and Protection Services were near copies of each other. Both divisions saw local currency sales up 3.1%. Both divisions saw growth in most of the world with the exception of Europe. In addition, both units saw margins of over 20%. Based on these strong margins, earnings increased 10.2% at Consumer Office, and 6.3% at Safety, Security and Protection Services. Neither division turned in spectacular results, but both were solid contributors to the company's bottom line with over $220 million and $258 million in profits respectively. The Safety, Security and Protection Services division should see some improvement in the next few years if analysts are to be believed. A direct competitor to this division is Tyco International (NYSE: TYC). Tyco owns the popular ADT security system, and also competes with 3M in building and safety products. This is another example where improvement in the economy would help both companies. With analysts calling for Tyco to turn in nearly 14% earnings growth in the next few years, clearly the expectation is the economy will improve.
The Two Challenges:
The company's two most challenging divisions were Electro and Communications and Display and Graphics. Electro and Communications suffered because the company competes in the hard drive assemblies area and weakness in the traditional hard drive space hurt results. In addition, price competition in the semiconductor and communication solutions space was a challenge. In this division, while local currency sales were down just 1.8%, the company had much bigger problems in Display and Graphics. This division saw local currency sales down 6.6%, and the company specifically blamed weakness in consumer electronics. In a strange split from the other divisions, the company also had problems with sales in the U.S., Asia-Pacific and Europe. Whereas most of the other divisions saw strong growth in Asia-Pacific and the U.S. Unfortunately for 3M, the price competition in items like LCD televisions is directly impacting their bottom line. This was evident in a double-digit decline in optical systems sales. One small positive note was the company saw double-digit sales increases in the architectural markets and commercial graphics businesses. However, what was certainly not positive was the divisions income, which was down over 19% on a year-over-year basis.
As you can see, buying 3M gives investors exposure to multiple industries at once. With the company's 2.54% yield and reasonable forward P/E ratio of 14.48, the stock looks attractive. When you consider that the company produced over $1 billion in free cash flow, which led to a free cash flow payout ratio of just 51.31%, it looks like the company's streak of increasing their dividend is going to continue. 3M is also doing what it can to improve long-term value by retiring shares, and the company has decreased its diluted share count by over 3% in the last year. Investors looking for diversification might not need to buy as many stocks if they stick with 3M and their over 55,000 products.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.