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Analyst Blog

On Jan 21, we reiterated our Neutral recommendation for diversified conglomerate 3M Company (MMM - Analyst Report). The sideline stance takes into account the company’s balanced business model with a diversified product portfolio and accelerating investments in high-growth programs, tempered by gross margin pressure and commodity price risk.

Why at Neutral?

The 3M brand is one of the most recognized and trusted names around the world. Common household products like Nexcare, Post-it, Scotch, Scotch-Brite and Scotchgard are market leaders in their individual categories. Portfolio management, investment in innovation and business transformation are the three key levers on which the company intends to focus moving forward.

3M intends to continue investing in capital expenditures and research and development to support organic growth. 3M expects to invest between $5 billion and $10 billion on acquisitions through 2017. The company has also been making efforts to reposition its portfolio by divesting assets that no longer fit its corporate strategy and indulging in investments which are more in tune with it.

3M continues to deliver sustainable increases in sales, earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs. 3M expects 9% to 11% growth in earnings per share, 4% to 6% organic revenue growth, 20% return on invested capital and approximately 100% free cash flow conversion in the period 2013–2017. We are impressed by the company’s record top-line growth in the last reported quarter and expect it to continue its bull run in the coming quarters.

3M has also recently increased its quarterly dividend by 35% for the first quarter of 2014. The company expects share repurchases in the 2013–2017 period in the range of $17 billion to $22 billion, up from its previous guidance of $7.5 billion to $15 billion. The company expects to further leverage its balance sheet to provide higher returns to shareholders. This offers a lucrative investment opportunity for investors seeking to own blue-chip stocks that promise a healthy return on investment.

However, the company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to market at acceptable price points. 3M generally manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts. These make it susceptible to commodity prices risk.

3M also faces fluctuation in foreign currency exchange rates that affects net investment in foreign subsidiaries and causes instability in cash flows related to foreign denominated transactions. These undermine its long-term growth to some extent.

Other Stocks to Consider

3M presently has a Zacks Rank #3 (Hold). Other companies in the industry that warrant a look include Carlisle Companies Incorporated (CSL - Snapshot Report), Crane Co. (CR - Snapshot Report) and Icahn Enterprises, L.P. (IEP), each carrying a Zacks Rank #2 (Buy).

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