December 26, 2012
3M (NYSE: MMM ) is a global company that generates revenue from more than 50,000 products in a number of diverse markets. That can make it hard to define the specific risks that will impact earnings. But I've combined a deep personal understanding of the company with in-depth research to find the three greatest risks to this great U.S. institution.
Below I've provided a look at those risks in a preview of our brand new premium report on 3M. In the full report, I've covered the opportunity, areas to watch, and taken a look at the company's recent innovation. See whether 3M can get its innovative mojo back by checking out the full report by clicking here.
A company the size of 3M is constantly at risk, but there are three factors in particular that investors should watch out for:
- Overseas competition.
From Post-it Notes to window film, 3M is constantly under pressure from competition, particularly from low-cost manufacturers in Asia. The best way to see the impact of this competition is by watching sales growth (in particular businesses versus industry averages) and watching margins. If competition becomes a worry, then 3M may have to compete on price, which will hurt margins going forward.
The amount of time and energy spent by 3M engineers to meet regulations in the U.S. (California) and Europe would leave investors amazed. When you're a chemical business, you need to constantly change formulas to meet environmental standards and improve quality. The company's issues with PFOS and PFOA in relation to Scotchgard can be cited as an example. 3M also spent millions to reformulate the Post-it Note over the past decade. These reformulations and regulations are a major risk to the company.
- Lack of inventiveness.
3M is able to stay where it is because engineers continue to create new products and reinvent old ones. This can be helped and hurt by forces outside the lab, such as management's and Wall Street's expectations. The wrong mix of forces could kill creative culture and threaten the company's ability to succeed. This can be difficult to identify on a large scale; keep an eye on product-related press releases from the company. If product announcements are grand or impactful for the company, that will be easy to identify; but if products like library technology continue to be a focus, then the company may be running out of ideas. Under CEO James McNerney, a little bit of inventiveness died; now, the worry is that erosion could continue under the wrong leadership. Keep an eye on the products coming out of 3M, and the level of growth attained, to see whether signs of invention and innovation are improving or deteriorating.
These risks will threaten each business at 3M in different ways, so investors need to keep an eye on how 3M performs in each of its five businesses to accurately assess the company's performance.
With over 50,000 products, 3M plays a role in making everything from computers to power cables. A long history of invention and innovation has driven the company to its wide reach, but a focus on operational efficiency may be hurting its creative culture. A new leader has taken over and vows to return innovation to the forefront. Does this mean the stock will become more than a dividend, returning to its former glory as a growth stock once again? Find out in the full version of The Motley Fool's comprehensive research report on the company. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out -- simply click here now to claim your copy today.