3M Company: Thrive Despite Supply Chain Problems


TThe decades-old concept of creating multi-faceted business conglomerates to create significant synergies seems to be fading as large, multi-activity companies abandon the concept. General Electric (GE), Toshiba (TOSBF) and Johnson & Johnson (JNJ) are among those who recently announced breakups.

One company that opposes the trend is 3M (MMM), at least so far. With a diverse product line that includes items such as post-it notes, medical tape, air filters, power tools, auto parts and lubricants, 3M has a long history of product innovation. As you would expect, the company serves a variety of industries including automotive, consumer, construction, electronics, energy, security, and transportation.

I’m bullish on MMM as supply chain issues will eventually subside and investors will turn away from risky, losing tech stocks to focus on quality dividend payers.

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Supply chain issues

If there’s one company that would be hit the hardest by supply chain disruptions in 2021, it’s 3M. Indeed, the company has manufacturing sites in 35 countries and works with more than 300 suppliers.

These supply chain issues, along with increases in raw material prices, reduced operating margins in the last quarter by 2.7%. This despite average single-digit organic revenue growth in most segments.

In order to deal with these issues, the company said it moves its products in different formats, such as rail traffic, shipments from ports without congestion, and 40% more cargo aircraft flights. . Logistics and software infrastructure have also been improved to better track the flow of goods in real time.

3e Quarterly review

Sales growth remained strong as global end-use demand remained robust. The Consumer segment shows the highest level of growth, with organic sales up 8.1%. This is likely because the stimulus-induced spending and pandemic recovery-related purchases continue to drive consumer activity.

Next come Safety and Industry, which rose 6.1%. The pockets of strong industrial growth were in the areas of adhesives, tapes and abrasives. Transportation and electronics grew 5.8% and were led by advanced materials and transportation safety. Organic sales declined in Electronics due to the continued impact of semiconductor shortages among customers.

Finally, Health grew by 4.1% and was driven by food security, oral care and health information systems. The higher growth levels in this segment were offset by lower sales of disposable respirators after facing tough competition from pandemic year 2020.

EPS growth was stable, due to the effects of supply chain constraints on operating margins. Rising commodity prices also negatively affected operating margins.

3M typically generates significant free cash flow and has been able to deliver $ 1.4 billion in cash to shareholders. That amount included $ 856 million in dividend payments and $ 527 million in gross share buybacks.

Macro trends

As a global conglomerate, 3M generally has the pulse of macroeconomic and business trends around the world. The company said end-market demand remains strong around the world as the post-pandemic recovery continues to take hold. However, the global semiconductor shortage remains a problem for many 3M customers, which subsequently affects 3M’s sale of certain electronic and industrial products to these customers.

3M also has good exposure to the health and dental markets in terms of elective procedures, and the company said the trends remained stable. The company did not foresee the end of supply chain problems, but said that “significant challenges related to the global supply chain, raw materials and logistics are expected to persist for the foreseeable future.” .

Valuation and dividend

MMM stock has retreated from its 2021 highs of $ 206 to around $ 179 today. EPS estimates for 2021 are $ 9.87 and $ 10.43 for 2022. A 17x forward P / E does not seem unreasonable, as these numbers take into account supply chain disruptions and commodity inflation. Normalized profits would likely produce a P / E in the mid-teens range.

3M’s dividend yield is well above market averages at 3.23%. The annual dividend of $ 5.92 produces a relatively high payout ratio of 60% over the 2021 estimate of $ 9.87. However, as noted above, 2021 and 2022 do not reflect the company’s full profit potential.

I am bullish on MMM stock as the valuation is not stretched like so many companies today in this endless bull market. In addition, based on its 120-year history, the company will continue to innovate and survive regardless of the economic environment or business challenges it faces.

The Taking of Wall Street

With respect to Wall Street, MMM has a Hold consensus rating based on 1 Buy, 7 Hold and 3 Sell ratings assigned over the past three months. At $ 189.80, the MMM’s average price target implies upside potential of 5.90%.

Disclosure: Disclosure: At the time of publication, Tom Kerr does not own any shares of the above mentioned stocks.

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