Sticking With 3M
Slow global growth can ding sales, but we still like the firm's long-term prospects.
Following the second-quarter earnings report, we are reiterating our $160 fair value estimate and wide economic moat rating for 3M (MMM). Currency took a big bite out of consolidated revenue, which fell 5.5% year over year to $7.7 billion for the quarter. However, organic revenue growth slowed as well, with year-over-year price increases holding steady at 1% and volume rising a modest 0.8%. In local currency, North America reported strong revenue growth of more than 4%, whereas Asia Pacific, Europe/Middle East/Africa, and Latin America/Canada just barely turned positive. This stark contrast illustrates the challenges that multinational 3M faces in an environment of slow global growth, which prompted management to trim its initial 2015 guidance for organic revenue growth to 2.5%-4% from 3%-6%. We've adjusted our near-term estimates accordingly.
Price increases combined with lower raw material costs contributed to nearly 110 basis points of year-over-year operating margin expansion to 23.9% in the quarter. That prices managed to stay positive despite weaker-than-average global demand for 3M's products is a testament to the pricing power inherent in the company's wide moat and the resilience of its business model. Sluggish economic environments in several of 3M's key markets, such as China, Western Europe, and Latin America, are likely to persist in the near term; however, we still believe that a strong product portfolio supported by a world-class research and development organization will support growth in excess of GDP over the long run. Furthermore, as 3M works through portfolio actions in order to find greater operational synergies among its business units, while feathering in acquisitions like the recently announced Capital Safety transaction, we expect a more efficient company will emerge.
Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.