Neutral on 3M Company

We are reaffirming our Neutral recommendation on 3M Company ( MMM - Analyst Report ) . The company achieved top-line and bottom-line growth during the quarter, outperforming the Zacks Consensus Estimate by $0.04.

The company’s sales increased in four out of its six business segments. Lower sales of optical systems and consumer electronics affected sales of the Display & Graphics and the Electro & Communication segments. Weak economic conditions continue to prevail in certain markets, with recovery not expected before the second quarter of the year.

3M’s sales growth in Asia-Pacific was affected in the quarter. However, quick benefits are expected after these markets revive.

The 3M brand is recognized around the world. Household names like Nexcare™, Post-it®, Scotch®, Scotch-Brite®, and Scotchgard™are market leaders. The company remains focused on inventing new products, with its scientists and innovators enjoying an important competitive advantage worldwide.

3M Company continues to deliver sustainable increases in sales, earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in higher growth programs. The company’s ability to convert high R&D spend into upcycle market share gains, pricing power, and margin determines its success.

Solid acquisitions, like Winterthur and Alpha Beta, by the company are also impressive. Free cash flow for the quarter was strong at $1.2 billion, up $116 million year over year. The company converted 128% of net income to free cash flow during the quarter.

However, the company’s growth objectives are largely dependent on timing and market acceptances 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.

Further, the company faces tremendous local competitive pressure, whether it is in Brazil, China, India or Indonesia. 3M believes that to survive in the competitive environment, it will have to locally develop, manufacture, hire, purchase and lead. While doing so, it will face insurmountable issues.

3M Company currently holds a Zacks Rank #3 which implies a short term Hold rating on the stock.