- 3M emphasizes innovation and keeps competitors away with generous levels of R&D spending, which typically totals nearly 6% of net sales.
- The company benefits from its shared technology platforms, which are applicable to multiple uses. Technology allows 3M to charge a 10%-30% premium for its products, but also brings down unit costs.
- 3M is likely to profit from repositioning its portfolio to faster-growing portions of global GDP. Over the long term, this should allow it to handily outperform the industrial production index.
- We think the dividend is safe and can grow at a mid-single-digit five-year compound annual rate.
- While 3M earned returns that doubled its cost of capital for over 25 years before the pandemic, gross profit over prior-year R&D spending has started to slow.
- The company faces several headwinds including slowing respirator sales, which represent an organic top-line headwind of 2% in 2022.
- 3M will struggle to attract and retain the best and brightest scientists and engineers, as future generations will increasingly gravitate toward the technology sector.
- Bears believe 3M's litigation liabilities could total tens of billions of dollars.
Morningstar Analyst Josh Aguilar Says
Litigation fears are an overhang on 3M’s MMM stock and are responsible for the persistent price/value gap, in our view. We think these fears are overblown. We also think the market fails to appreciate 3M’s short-cycle nature, which benefits during the early stage of a recovery.
In our view, 3M is a GDP-plus business. We attribute 3M’s ability to remain ahead of GDP to its suite of innovative products, which are a byproduct of its research and development efforts. At its core, 3M is a materials science company. Its legion of engineers improves everyday products down to their basic chemistry. For instance, 3M’s microreplication technology, which has been around since the 1960s, was originally used in overhead projectors. That technology has now been adapted for multiple uses, including making signs brighter and reducing friction in aerospace applications. More recently, it is being developed for vaccine delivery as an alternative to hypodermic needles.
The company’s proprietary secrets are closely held; 3M rarely grants licenses, yet its technology is difficult to imitate. As a result, 3M typically charges a 10%-30% price premium relative to the market. Its ability to adapt its technology for multiple uses also gives it economies of scope, which helps reduce overall unit costs, evident in superior gross margins.
We believe the company can increase its top line over 4% over the medium term thanks to broad-based strength, even as respirator sales become a near-term headwind. With the recent acquisitions of workflow solutions provider M*Modal and negative woundcare solutions provider Acelity, we believe 3M can capitalize on the stable and ever-growing healthcare market. Healthcare benefits from multiple positive secular trends, including an aging population, greater access to care, and a rising incidence of chronic disease and surgical procedures.
3M hasn’t increased intrinsic value over the past four years, by our measure; we attribute this to a combination of self-inflicted wounds and pandemic-related headwinds. Even so, we think the company is well positioned in some higher-growth markets.