Will 3M Beat Out Dow Peers General Electric and United Technologies in 2014?

3M (MMM 0.41%) has given its shareholders amazing returns in 2013, with the manufacturing conglomerate posting gains of 53% so far this year, more than doubling the returns of the Dow Jones Industrials (^DJI 0.69%). Yet even with all the strong moves it made this year, much of 3M's gains came from investors being willing to pay a higher earnings multiple in anticipation of faster net-income growth in the future. Will 3M deliver on that promise, or will rival conglomerates General Electric (GE 8.28%) and United Technologies (RTX -0.18%) have a chance to catch up in 2014 and beyond?

3M has taken a lot of strides forward in the past year, with CEO Inge Thulin having gained valuable experience in running the company. Moves to consolidate its acquisitions, including its major buyout of Ceradyne late last year, have started bearing fruit in improving 3M's fundamentals. Nevertheless, looking forward, 3M will have to keep up its pace to justify the confidence that shareholders have expressed in the conglomerate's future. Let's take a closer look at 3M's prospects at beating the Dow, General Electric, and United Technologies in 2014.

Stats on 3M

Source: Yahoo Finance.

What's ahead for 3M in 2014?
3M's stratospheric rise in 2013 has left many investors who follow the stock thinking shares don't have any further to run higher. The average target stock price that analysts have set is 3% to 4% below where the shares currently trade, and even when you incorporate 3M's 2.5% dividend yield, that suggests professional investors believe 3M will post a negative total return for the near future.

3M has done a reasonably good job of demonstrating its growth potential during 2013. In its most recent quarterly results, 3M set records for revenue and earnings per share, reflecting the progress that 3M has made. It also raised its dividend for the 55th year in a row, giving it one of the most impressive tenures of annual dividend increases among major U.S. companies. Yet investors haven't had complete confidence in 3M's progress, as one major analyst pointed to the fact that operating income posted year-over-year declines in the company's three biggest revenue-producing divisions during the first nine months of 2013.

Image copyright 3M 2013. All rights reserved.

As has been the case for several years now, the biggest challenge that 3M has faced has been trying to boost organic growth. Conglomerate peers General Electric and United Technologies have both used outside acquisitions extensively to produce gains in revenue. United Technologies' major buyout of Goodrich helped the conglomerate greatly increase its exposure to the high-growth aerospace industry, helping it focus its business on its best prospects. Similarly, General Electric has made moves to boost its presence in the energy space, including the buyout of oil-services company Lufkin Industries. In that light, 3M's purchase of Ceradyne doesn't seem all that unusual, but it does expose the relative ease of acquiring outside businesses compared to growing sales from already-existing operations.

Yet 3M has set high expectations in its own guidance for 2014. In mid-December, 3M reiterated its long-term objectives of 9% to 11% annual growth in earnings per share, organic revenue gains of 4% to 6% annually, and 20% returns on invested capital. To get there, the company expects to combine investment in capital expenditures and research and development with further acquisitions, with expectations of spending between $5 billion and $10 billion to make buyouts in the next four years. 3M's guidance for earnings between $7.30 and $7.55 per share and revenue growth of 3% to 6% exclusive of currency impacts is consistent with those long-term goals.

3M's 2014 performance compared to the Dow will rely on the company's ability to deliver the growth that it has promised and that investors have expected in sending the stock price up so far this year. Competition from business rivals in 3M's most important segments will force the company to work hard to produce even a fraction of the gains it has enjoyed in 2013. But with that effort, 3M could set the stage for longer-term gains not only in 2014 but for future years as well that could put General Electric, United Technologies, and the broader Dow to shame.

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