For decades, 3M (MMM +1.25%) was one of the shining examples of innovation in corporate America. The company built a juggernaut based on everything from sandpaper to Post-It Notes to thin films potentially used in the electronic device you're reading this on today.
But over the last two decades, the company has lost that title as an innovation machine. It seems to be focused more on efficiency than on creating new products and growth, which has slowed earnings. Growth is almost non-existent, and 3M is now selling off non-core assets. That has had a detrimental effect on the stock's performance.
So is this new 3M still a buy, or are the stock's best days behind it?
Key Data Points
The numbers at 3M
These three charts give an idea of where 3M sits today. You can see in the chart below that revenue has effectively stalled at 2018 levels as management instituted Six Sigma and focused on operational efficiency over innovation.
MMM Revenue (TTM) data by YCharts
Worse yet, initial gains from efficiency have worn off, and now margins are under pressure. You can see in the chart below that gross margins and operating margins have been in decline for years, and that decline doesn't seem to be slowing down anytime soon.
MMM Gross Profit Margin data by YCharts
3M could combat these losses by investing in future products via increasing research and development (R&D), but that's not what it's doing. It's cutting back on R&D to save on costs and increase profits in the short term. This is the kind of short-term mindset that an efficiency focus brings, but it is the antithesis of how 3M was built.
MMM R&D to Revenue (TTM) data by YCharts
These trends are moving in the wrong direction, and these aren't short-term blips in the business. They're structural trends that have taken place over decades. 3M simply isn't the high performer it once was.
Competition has eaten 3M's lunch
There are a number of reasons 3M's business has deteriorated, and with thousands of products, there's no single driver of the business. But what's clear in the past two decades is that competition from foreign manufacturers has eaten into the business and the brands that once drove that business are no longer as valuable.
Global competition is better than ever, and commodity products that 3M makes are no longer differentiated, as low-cost competitors have improved quality.
On the brand side, 3M drove value from brands like Scotch, Post-It, and Scotchgard for years. But now retailers are moving toward private labeled brands (some of which 3M manufactures), and internet-enabled brands are able to take market share. The supply power 3M had for decades is gone.
3M has no easy answers
What's 3M to do in a world where direct customer relationships (that 3M doesn't have) are more valuable and retailers are looking for lower-cost sources of supply? There's no easy answer.
In many ways, this is the conglomerate that dominated the late 20th century and is now proving to be too slow to react to the modern competitive environment. 3M could follow other conglomerates in splitting into smaller businesses, but that's a painful process for a company to go through.
Until we see a turnaround in action, I'm going to watch on the sidelines and not buy this stock, waiting to see if this once-great company regains its form and justifies its stock's valuation.
