Shares of diversified conglomerate 3M Company (MMM) hit a new 52-week high of $147.06 on Sep 18, 2014, before closing the trading session a notch lower at $146.84. This translates to a healthy one-year return of 20.8%. Despite its strong price appreciation, this Zacks Rank #3 (Hold) stock still has enough fundamentals that may further drive its price upward. The stock is currently trading at a forward P/E of 19.4x and has a long-term earnings growth expectation of 11.3%.
Growth Drivers
3M recently completed the acquisition of its Japanese joint venture Sumitomo 3M Ltd. to be the sole owner of the entity. 3M purchased Sumitomo Electric Industries Ltd’s 25% stake in the joint venture for approximately $865 million. Post acquisition, the business will be known as 3M Japan Ltd, with 3M having full control of one of its largest subsidiaries.
Sumitomo 3M has a leading market share in most of the industrial divisions including electronics and energy. The acquisition is expected to be accretive by approximately 8 cents per share to 3M’s earnings during the first year of its operation. The company also expects significant opportunities in Japan's addressable markets for healthcare, safety and graphics and consumer businesses.
3M has been focusing on restructuring initiatives to transfer capital from low-margin businesses to more lucrative opportunities, thus generating better return on capital. Furthermore, the company’s continued investment in research and development enables it to generate organic growth by innovating products and applications that capture premium pricing in early stages of their life cycle. This enables the company to consistently improve its margins and capitalize on its brand value.
Portfolio management, investment in innovation, and business transformation are the three key levers on which the company intends to focus, moving forward. With a steady stream of innovative products, 3M expects earnings in 2014 to be in the range of $7.30 to $7.55 per share with organic local currency sales growth of 3% to 6% despite a challenging macroeconomic environment. We remain bullish on the stock and expect it to move further northwards.
Other Stocks to Consider
Other companies in the industry that are worth mentioning include CLARCOR Inc. (CLC), Federal Signal Corp. (FSS) and ITT Corporation (ITT), each carrying a Zacks Rank #2 (Buy).
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