How 3M Can Reach Its Aggressive 5-Year Targets
3M (NYSE:MMM) projects annual earnings growth between 9% and 11% for the next 5 years. [1] The company plans to achieve this by capturing market penetration opportunities in developing markets, increasing its focus on growth industries like mining and energy, capturing market share opportunities in developed markets, and increasing research and development spending that generates premium returns through innovative products.
These projected growth figures come after 3M lowered its 2012 earnings forecast last month on continuing slowdown in Europe and slowing growth in emerging economies. However, the company believes the projected growth rates to be achievable. Trefis currently has a stock price estimate of $93.36 for the company, marginally above its current market price.
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The 5-year financial targets
3M anticipates average worldwide industrial production (IP) growth of 3-4% per year from 2013 to 2017. The company’s organic sales growth lead worldwide IP growth by a factor of 1.5 from 2003 to 2012E (estimated). Accordingly, it anticipates organic sales to grow between 4% and 6% per year over the next five years. [2] The company manufactures a variety of industrial products including vinyl, polyester, foil, specialty tapes, packaging equipment and filtration products, and industrial businesses constitute nearly 30% of 3M’s total value according to Trefis estimates. Thus, 3M’s growth in highly correlated with worldwide IP growth.
In addition, 3M projects strategic acquisitions to contribute to organic sales growth. The company anticipates to spend $1 billion – $2 billion per year on acquisitions to complement sales from existing businesses. [2] Last month, it announced the $860 million Ceradyne acquisition that enhances its capabilities and presence in the field of advanced ceramics.
To achieve this growth in its sales and earnings the company plans to implement multiple strategies.
Strategy 1: Capitalizing on market penetration opportunities in emerging markets
3M plans to increase its penetration in high growth markets of emerging economies over next 5 years. The company projects that sales from emerging markets will constitute 40-45% of its total sales in 2017 compared to 35% in 2012E. [2] Through its portfolio that spans industrial, infrastructure, health care and consumer products the company is well positioned to benefit from increasing infrastructure spending, expanding manufacturing sectors, rising health care standards and increasing middle class spending in key, large emerging markets of China, India, Brazil among others.
The company projects its China sales to grow from the present $2.2 billion per year to $5 billion per year by 2017. Its sales from Latin America are expected to rise from $2.6 billion in 2012E to $4-5 billion in 2017. [2] Additionally, sales from Latin America have posted double digit organic growth for 11 consecutive quarters.
Strategy 2: Capitalizing on market share opportunities in developed markets
3M also sees market share expansion possibilities in key developed markets such as the U.S. to add to its growth. The company’s sales from the U.S. are estimated to be around $10.5 billion in 2012, and this projected to rise between $12 billion and $13.5 billion by 2017. [2]
Strategy 3: Increasing focus on growth sectors
The company also plans to customize its product offering and increase sales focus on expanding sectors including mining, oil & gas and automotive to achieve its financial targets. In the mining and oil & gas sectors the company plans to double its sales from the present $1 billion to $2 billion by 2017. In the automotive OEM sector it plans to increase its sales from $1.3 billion in 2012E to $1.9-$2.1 billion by 2017. [2]
Strategy 4: Increasing R&D spend to increase the proportion of high profit products
Finally, the company will also increase its spending on R&D to develop new products and customize existing ones in order to open new market opportunities. Innovative products generate higher returns and thereby have comparatively higher margins. Overall, higher proportion of newer products in the product portfolio of the company adds to its earnings growth.
3M plans to raise its R&D investment from 5.3% of sales in 2011 to nearly 6% of sales in 2017. [2] As a result it anticipates its proportion of new products in its product portfolio to rise substantially. In 2007, 23% of its sales came from products that were launched within the past five years. In 2012 this number is expected to be around 33% and in 2017 this number is expected to rise to 40%. [2] As the company expands in to growth markets and enters in to new ones, it sets up local R&D and capability centers that help it in driving innovation.
All in all, in spite of the weak current global economic environment 3M projects good growth over the next 5 years, benefiting from its presence across sectors from infrastructure to health care, its global manufacturing base and sourcing capabilities, and its innovative approach to solving problems.
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