Please ensure Javascript is enabled for purposes of website accessibility

3M Company Is Showing Some Signs of Life

By Travis Hoium - Jul 27, 2017 at 10:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Electronics sales are growing, but will the rest of the business come along for the ride?

3M Company (MMM 0.19%) has never been a company whose earnings reports reveal an expansive business growing at a consistent and impressive pace. That was no different in the second quarter of 2017, when sales rose 1.9% to $7.8 billion and only one business segment posted growth above 2.5%. 

But there are some positive signs for 3M in 2017. And they could help drive the stock higher this year. 

Circuit board under blue lights.

Electronics are the big growth driver at 3M. Image source: Getty Images.

Electronics are unusually strong

The best segment for 3M was electronics, which had 15% growth organically year over year. Management said the growth was due to "increased penetration on many OEM platforms," but I wouldn't be surprised if the growth was driven by a ramp-up in production of a hit new electronic device -- the coming iPhone 8. 3M will see revenue a quarter or two ahead of any major product launch, so we could be seeing early signs that new smartphones will be hitting the market this fall. 

It should also be no surprise that Asia-Pacific had organic local currency growth of 10% in the second quarter, compared with 1.9% growth in the U.S, 3.7% growth in Latin America, and a 1.6% decline in Europe, the Middle East, and Africa. Electronics are primarily assembled in Asia, and for now, electronics is what's driving 3M. 

There are still some weaknesses at 3M

Despite electronics growth of 15% organically, the rest of 3M showed more tepid results. Energy revenue declined 3% organically. Consumer sales grew just 0.7% organically. Nor did health care (+2.5%), safety and graphics (+3.2%), and industrials (+3.8%) show impressive growth in comparison with an estimated 3.1% increase in U.S. real GDP growth during the second quarter. 

On the surface, overall organic growth of 3.5% at 3M seems strong, but in a fairly strong economic environment, it's troubling that only electronics showed anywhere near double-digit growth. And that might be a problem long-term. 

Reservations about 3M's long-term growth

The question for investors is, how long will the electronics boom last? 3M has always had hits in different market segments to drive most of its growth, so the fact that electronics is the only strong point isn't necessarily bad. For example, when TVs and laptops were booming, it was display and graphics that drove growth, and when the Post-it Note was invented, the consumer business drove the company. 

Electronics could be 3M's growth driver over the next few years while other business segments stay flat or grow slightly. The risk is that this could be a one-time boost in sales because of one or more product launches slated for the second half of the year. If that's the case, the organic growth I highlighted could be short-lived. 

What to expect from 3M

3M isn't really a growth company. It should be regarded as a company that's worth owning for the dividend and continuous share buybacks. More than 100% of the company's free cash flow is used to pay dividends or buy back shares:

MMM Free Cash Flow (TTM) Chart

MMM Free Cash Flow (TTM) data by YCharts

But it may not be worth paying 24 times earnings for a company with fairly slow growth and a relatively low 2.2% dividend yield. 3M is is growing at a steady pace, which is a sign of life if it continues, but I think that's still too much to pay for a company without much in the way of sustained growth prospects. 

Travis Hoium owns shares of 3M and Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

3M Company Stock Quote
3M Company
$149.66 (0.19%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.