All About 3M, Part 2
The company analysis continues

by Chris Rugaber (TMF

ALEXANDRIA, VA (June 29, 1999) -- Regular readers of this space may not have expected to see me writing today. I've moved from my usual Thursday slot to Tuesday. This is so I can get my article done earlier in the week and then slack off until the weekend.

Well, not really, of course. In fact, let me take a quick minute to mention what I actually do the rest of my time around here. I put together The Weekly Fool, a compendium of the best of our online content, delivered via e-mail, and now I'm also editing our new Motley Fool Monthly, available by e-mail or through the good ol' U.S. mail.

If you're interested in receiving regular doses of Foolishness in a weekly newsletter or monthly magazine format, check out both of these products in FoolMart.

Now, back to our regular programming...

Last Thursday, I began our survey of Foolish Four company Minnesota Mining & Manufacturing (NYSE: MMM) using the same format we used for International Paper (NYSE: IP). We looked at how MMM organized itself as a business, and what it told us about the Foolish Four. Today we'll look at how Minnesota Mining (better known as 3M) ended up as a Foolish Four company and consider what we should look for during the remainder of our year-and-a-day holding period.


Like many other Dow companies, 3M has been hit hard by international economic troubles, which is no surprise given that in 1998 the company earned over 52% of its revenue overseas. Then just as its Asian markets seemed to improve, this year's first quarter results were dampened by Brazil's economic contraction.

Related to its international woes, the company has been hurt by the dollar's strength relative to many other currencies. For example, in the first quarter of this year, international sales were up 2.5% in U.S. dollars, but 4.5% in local currencies. The company acknowledges that currency fluctuations reduced 1998 earnings by 9%, and could reduce its 1999 sales by 3%.

Many multinational corporations try to smooth out these currency fluctuations through various hedging programs, so that a stronger dollar won't impact earnings as much. 3M doesn't attempt to do this, contributing to its reputation of fiscal conservatism, which has frustrated some of the Wall Street analysts following the company. However, a Minneapolis newspaper reported in March that the company was "studying" hedging programs, so perhaps we'll see some improvement there.

In addition to the company's international woes, domestic sales haven't been so great either. Last year, in fact, U.S. sales fell slightly. Many analysts point to the company's lack of quality new products as an ongoing problem. Innovation is critical for 3M, since new products have more pricing power. Once competition does appear, 3M cuts prices and reduces profit margins to maintain market share.

As a result, 3M has always aimed to have one-third of its sales generated from new products, which it defines as those that have only been on the market four years or less. The company met that goal in 1998, but critics note that 3M's "new" products aren't always that innovative. The company's "Pacing Plus" program, introduced five years ago as a way to speed new products to market, has produced successful items, such as the Microflex circuits and the new reflective sheeting for road signs that we discussed last Thursday. But then there are the "Pop-up Tape Strips," which use tape dispensers you can wrap around your wrist. Convenient, perhaps, but hardly a major breakthrough.

Pacing Plus barely missed its 1998 sales target of $1 billion and is expected to produce $1.5 billion in sales this year and $3 billion by 2000, so we shall see.


Despite these bumps in the road that brought 3M to Foolish Four land, the company has plenty going for it, and it did beat first quarter 1999 estimates. Those of us who own 3M should hope for the following things: that the Pacing Plus program hits its above-mentioned targets; that the funding for new roads, highways, and bridges included in last year's federal highway legislation produces plenty of growth for 3M's transportation division; that the company completes its restructuring program by the end of this year, as planned; and that the international economy continues to improve.

There are several Pacing Plus products investors should keep their eyes on, including the new Scotch Brite cleaning cloths (the company calls them "High Performance Cloths"); Aldara Cream, a genital warts treatment I made some juvenile remarks about last Thursday; and the Microflex circuits. The Scotch Brite cloths were introduced in Europe last year, but will go world-wide this year and may already be in a store near you. The Aldara Cream is based on a new compound, known as imiquimod, that may also work as an effective treatment for genital herpes, cervical cancer, and perhaps even hepatitis C. And the Microflex Circuits could double in sales this year, especially if Asia avoids any more trouble.

Finally, 3M's restructuring should reduce costs. The company is in the process of cutting 4,500 jobs by the end of this year, or about 5% of its workforce. 3M's goal is to reduce sales, general and administrative (SG&A) expenses to 23.5% of revenues, from 1998's 25.2%. We will definitely check 3M's margins as the year progresses and see how they're doing.

Either way, as of last night 3M was up 18.25% for this portfolio, so we can't complain much. But if the company can successfully execute its restructuring and introduction of new products this year and gets a little help from the global economy, more upside potential certainly exists.

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06/29/99 Close
Stock  Change   Last
CAT  +   7/16  61.13
JPM  +1 11/16  135.75
MMM  +   1/16  87.06
IP   +1  7/16  52.75

                  Day    Month   Year   History
        FOOL-4   +1.14%   4.41%  26.78%  28.66%
        DJIA     +1.50%   2.42%  18.58%  18.11%
        S&P 500  +1.51%   3.81%  10.52%  10.79%
        NASDAQ   +1.52%   6.95%  20.50%  22.15%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     61.13    41.89%
 12/24/98    9 JP Morgan    105.51    135.75    28.66%
 12/24/98   22 Int'l Paper   43.55     52.75    21.13%
 12/24/98   14 3M            73.57     87.06    18.34%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1467.00   $433.00
 12/24/98    9 JP Morgan    949.62   1221.75   $272.13
 12/24/98   22 Int'l Paper  958.12   1160.50   $202.38
 12/24/98   14 3M          1030.00   1218.88   $188.88

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5146.38