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Stock Analyst Update

3M Recovers on Back of Strong Economy

Recent earnings solid, but firm is vulnerable to cyclical downturns.

Diversified conglomerate 3M (MMM) reported a generally strong quarter Wednesday, continuing its recovery from a disastrous 1998. If the world economy slows, however, 3M will again suffer.

3M's second-quarter net earnings came in at $1.18 a share, up 15% from a year ago (excluding a one-time gain last year from asset sales) and $0.02 above consensus expectations. Sales increased 9%, driven mainly by 15% growth overseas, where 3M gets more than half its revenues. These healthy results indicate that 3M is recovering nicely from the bad stumble it took two years ago when economies in Asia and many emerging markets collapsed. The company said Wednesday that it expects earnings to recover throughout this year and into 2001.

One way 3M is trying to maintain its growth is by emphasizing faster-growing products tied to hot industries rather than the industrial products from which it gets most of its sales. Recent acquisitions in its Electro and Communications division, which makes components for electronics and telecommunication firms, have increased 3M's presence in the fiber-optic component market. 3M's fastest-growing product line comprises optical films that make computer, cell-phone, and electronic-organizer displays brighter.

Despite attempts to piggyback on the technology boom, 3M primarily remains an industrial company, and as such, its fortunes are tied to the general economy. While it's encouraging to see 3M recovering so well from its recent troubles, investors should nonetheless tread carefully with this cyclical company.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.