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3M (MMM) Focuses on Core Businesses Despite Potential Risks

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On Oct 2, we issued an updated research report on industrial goods manufacturer, 3M Company (MMM - Free Report) .

3M continues to witness sustainable increase in earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs. The company’s ability to convert high R&D spends into up-cycle market share gains and strong pricing powers are the reasons for its success. Organic growth remains the first priority of the company as it continues to invest in infrastructure and commercialization capability.

Growth Drivers

Portfolio management, investment in innovation and business transformation are the three key areas on which the company intends to focus moving forward. 3M also intends to continue investing in capital expenditures and R&D to support organic growth as it targets a prudent capital structure strategy and increased capital deployment. The company’s global footprint, diversified product portfolio and the ability to penetrate in different markets are its forte.

With core business focus, 3M has outperformed the industry with an average year-to-date return of 17.6% as against a decline of 1.7% for the latter. The company raised its earlier guidance for 2017 on strong quarterly results and improved business outlook. 3M anticipates 2017 GAAP earnings in the range of $8.80 to $9.05 per share, up from prior projection of $8.70-$9.05. This represents year-over-year growth of 8-11%, up from 7-11% expected earlier. Organic local-currency sales are expected to be 3-5%, up from 2-5% expected earlier.



For the five-year period of 2016-2020, 3M expects 8-11% growth in earnings per share driven by an organic sales growth of 2-5%. The company expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%. Furthermore, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500 million to $700 million in annual operational savings by 2020 and an additional $500 million reduction in working capital. Such focused attempts to maintain growth momentum is commendable.

Potential Headwinds

However, given its international presence, adverse foreign currency translations are likely to affect the company’s ability to realize projected growth rates in its sales and earnings. Fluctuations in foreign currency exchange rates affect the company’s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions. These undermine its long-term growth potential to some extent.

In addition, 3M is facing increased pension expenses as its workforce begins to retire. The related extra costs would be a drag on the company’s bottom line. Also, as exports are a significant part of the company’s operations and growth prospects, the sustained strength in U.S. dollar will continue to negatively impact the company’s earnings in the short-term.

Zacks Rank & Key Picks

Nevertheless, we remain impressed with the long-term growth potential of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the industry include Federal Signal Corporation (FSS - Free Report) , Crane Co. (CR - Free Report) and Barloworld Limited (BRRAY - Free Report) , each carrying Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Federal Signal has beaten earnings estimates thrice in the trailing four quarters with an average positive surprise of 9.5%.

Crane has a long-term earnings growth expectation of 10.1%. It has beaten earnings estimates in each of the trailing four quarters with an average positive surprise of 4%.

Barloworld has a long-term earnings growth expectation of 17.3%.

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