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3M's 3 Challenges

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 12:53PM

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Despite at least three significant challenges, 3M looks like a solid value.

History shows that conglomerates don't always get their full due in the markets. Nevertheless, I believe that 3M (NYSE:MMM) remains a solid value. Although there are challenges before the company, I still see this as a solid long-term play.

Results for the second quarter were all right. Sales grew 3.5% net of foreign currency, with more than three-quarters of that growth coming from volume increases. While sales growth in health care, electro/communications, and display/graphics was unimpressive, segments such as safety/security, transportation, and consumer/office did significantly better.

While sales growth was a bit sluggish, operating margins expanded again, and the company saw 8% operating income growth. Excluding an unusual tax expense related to repatriating foreign earnings, net income grew 10% for the quarter -- a solid performance, in my opinion.

In my view, 3M has three primary challenges to deal with in the course of the next 12-18 months. The first, and most obvious, is the replacement of former CEO James McNerney, who recently left 3M to take the reins at Boeing. While I believe many of McNerney's positive changes will be left in place, his short tenure at 3M would suggest to me that a well-groomed successor is probably not waiting in the wings at the company. CEO transitions are always tricky, so investors should keep a careful eye on the board's selection of a replacement.

Secondly, 3M must look to reignite growth in some of its lagging businesses. Improvements in the LCD markets should help the display business in the back half of the year, assuming that widespread predictions of an improving market hold true. Health care is 3M's largest business, and it will be important for the company to take steps to restore stronger top-line growth.

Finally, 3M has to finish the acquisition and integration of CUNO. This is hardly the first time that 3M has made a deal, and I don't imagine that there will be any major problems. Nevertheless, with uncertainty at the top of the management food chain and a need to pick up the pace of growth in some of the company's business lines, top-level management will have to guard against taking their eyes off of this important process, as well.

Even with those challenges, I'm not particularly worried. 3M has solid margins and offers strong returns on assets and equity. While the P/E seems a bit elevated, quality large-cap stocks usually do get a bit of a premium. With a fair dividend, an attractive suite of businesses, and an opportunity for even better performance, I still like 3M.

3 takes on 3M:

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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3M Company Stock Quote
3M Company
MMM
$112.99 (-1.01%) $-1.15

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