3M Company

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

A multinational conglomerate, 3M operates across diverse sectors with a history of innovation, a vast product portfolio, and a presence in numerous markets, creating some competitive advantages.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

3M is a diversified global manufacturer with operations in four main segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer. This categorization reflects the breadth and complexity of 3M’s businesses, making its analysis multifaceted.

Business Overview

3M’s financial performance is a mixed bag at present. The company has several noteworthy issues it has been going through. A few segments are doing good while others are struggling. Looking at the segments in the last report we have:

  • Safety and Industrial: This segment, the largest, produces personal safety equipment, abrasives, tapes, adhesives, and films.
    • In Q3 2023, Safety and Industrial segment generated revenues of $3.1 billion, down 4.7% Y/Y with organic sales declining by 5.1%.
  • Transportation and Electronics: This segment is known for products such as advanced materials, including films, adhesives, and ceramics, for the automotive, electronics, and transportation industries.
    • Sales in this segment were $2.1 billion, a decrease of 11% Y/Y with organic sales dropping by 9.6%.
  • Health Care: 3M’s healthcare division includes medical and surgical supplies, dental and orthodontic products, drug-delivery systems, and health information systems.
    • It recorded sales of $2.1 billion for the quarter, a 2.3% increase Y/Y, and organic sales were up 0.9%.
  • Consumer: The Consumer segment focuses on home and office products, stationery, and home improvement items.
    • It generated revenues of $1.2 billion, down by 3.2% from the previous year. Organic sales declined by 3.4%.

The decrease in total sales was partially caused by the divestiture of the healthcare business.

Overall, 3M’s financial results are complex: revenues have declined in two segments (Safety and Industrial, and Transportation and Electronics) and increased by a small margin in Health Care. Consumer is also declining. Moreover, the company’s net income from continuing operations was negative at around ($2) Billion, which is mostly due to restructuring, impairment, and large liability and litigation costs.

Profitability and Margins

3M has seen major changes to its profitability in recent years. The company faces a multitude of operational challenges.

  • Gross margin was 43.6%, compared to 49.1% a year ago.
  • Operating margin in the recent report was -32.8% vs 18.5% in the same time period the prior year.
  • A huge change is due to the change in 3M’s pension obligation, which is also the main reason why the tax rate was 46% vs -36% in the previous year.
  • Operating cash flows also declined from 1.7 Billion to 1.3 Billion.

These metrics indicate that the company’s profitability is in serious trouble and is severely affected by factors such as liabilities and litigation, impairment charges, and high taxation.

Competitive Landscape

3M operates in diverse, highly competitive markets that feature various companies. Here is some competition analysis:

  • In Safety and Industrial, the company competes against other established names such as Honeywell, MSA Safety, and DuPont. The key factors in this space are innovation, product quality, price, brand reputation and access to customers.
  • Transportation and Electronics sees its competition in large companies such as DuPont, Covestro, and Eastman, focusing mainly on performance and innovation, and to some extent cost.
  • Health Care has a lot of players with strong competitive advantages in specialized sectors such as Johnson & Johnson, Medtronic, and Becton Dickinson. New product development and regulatory expertise are very important factors here.
  • Consumer has lots of competition and it’s a tough market to navigate through. Here companies like Procter & Gamble, Unilever, and Colgate-Palmolive are some of the competitors. Brand loyalty, pricing, and distribution networks matter more in this competitive sector.

Overall, 3M faces a lot of competition with strong, experienced players in each of its core segments. However, the company manages to maintain itself due to its diverse product portfolio, innovative power, and worldwide reach.

What Makes 3M Different?

Several things set 3M apart from its competition:

  • Innovation Culture: 3M is renowned for its culture of innovation. The company generates a large amount of its sales from products that were developed in the recent past. This commitment to R&D allows the company to remain competitive.
  • Diversification: 3M’s diversified portfolio across many different industries allows it to withstand economic downturns. It is not dependent on a single industry for all its revenue.
  • Brand Recognition: 3M’s brand is recognized in several industries, signifying high quality, which provides a lot of advantages such as client loyalty. This allows 3M to maintain profits even with premium pricing.

Financials in Depth

3M’s financials have shown a decline in total net sales by 5% Y/Y in the 2023 Q3 report. This was mainly attributable to the spin-off of its healthcare business, which significantly lowered sales across the board. As mentioned above, the company has negative net earnings and negative operating cash flow for the reporting period. Here is some other information about the latest financials:

  • Revenue: Total revenues were $8.3 billion.
  • Operating Expenses: Selling, general, and administrative expenses were $3 billion, and research, development and related expenses were $0.4 billion.
  • Income before taxes: Loss of $2.3 billion.
  • Net Income: Loss of $1.9 billion.

The debt is increasing on the balance sheet, which should be monitored.

Moat Rating: 3/5

3M possesses a narrow moat based on certain durable competitive advantages. It primarily has a strong history of innovation, diversification, and brand recognition. These factors help protect its market share and profitability and provide a competitive edge. However, this moat is not considered wide as the company is facing a lot of competition in all its segments, also recent challenges of declining margins and sales volume should also be considered. The company is being forced to spend heavily to counter the issues and their effects in their financials.

Understandability Rating: 3/5

The business is complex because it operates in many different industries with diverse products. Understanding how it makes money from all those sectors is a bit difficult. On the other hand, its core concept of producing innovative products, using its distribution network and selling them to different parts of the world is pretty straightforward.

Balance Sheet Health: 3/5

The company is in a reasonable position, but it is not as strong as in previous years. Debt levels are on the higher side and the company’s current cash flows are not ideal. But 3M’s credit is still at investment grade which can allow them to raise money if it needs it. Hence, the company has a bit less maneuverability than its competitors to adjust quickly with the changing times.

Risks to the Moat and Business Resilience

Several legitimate risks could erode 3M’s moat and impact the company:

  • Technology Disruption: Rapid technological changes could render some of 3M’s products and processes obsolete, reducing their value and competitive advantage.
  • Litigation and Liabilities: Ongoing litigation associated with past production could continue to create issues on the profitability of the company. For example: PFAS and other liabilities have weighed on the company’s balance sheet, eroding the shareholder’s value.
  • Competition: Intense competition in all the sectors can erode profitability and market share if they fail to innovate and stay ahead of their competitors.
  • Economic Fluctuations: The company’s performance is heavily influenced by different macro-economic conditions, which can be detrimental to some of its segments.

3M has faced several issues such as the COVID pandemic, economic and geopolitical uncertainties, and multiple lawsuits. Management acknowledges the challenges but emphasizes its focus on innovation, growth, restructuring, and portfolio management to overcome them. The company has been in discussion with regulatory agencies to manage and resolve legal issues and is also focusing on driving growth and reducing costs. They are also aggressively managing their portfolio and are focusing on businesses with higher long-term upside. Despite all the issues, the management appears confident in the long-term strategy and its ability to generate value over the coming years.