Thirty-six yards of Scotch Tape costs just a few dollars. While most of us have a roll or two on hand, it’s hardly a daily staple. Yet the company that Scotch Tape is the signature product of, 3M Co. (MMM), has a market cap of $102.8 billion, as of July 18, 2019. Are adhesives really that big of a business? When coupled with dozens of other enterprises under one roof, the answer is yes.
3M generates billions in net sales each year from the sale of products across five different business segments. In more than a decade of history, 3M has become one of the world's leading providers of miscellaneous products across all of these industries and others. The company sells its products both directly to consumers and through a host of wholesalers, retailers, and distributors. It also invests heavily in research and development (R&D) in order to continue to improve and grow its product lines. In 2018, the company invested more than $1.8 billion in R&D.
The Minnesota Mining and Manufacturing Company got its start in the early 20th century by extracting corundum, a mineral that readers of childhood science textbooks may remember as one level below diamond on the Mohs Hardness Scale. These days, 3M has expanded beyond corundum to the point that it sells a more diverse line of products than just about any industrial conglomerate on the market. For 2018, 3M reported $32.8 billion in sales, up about 3.5% from 2017. The company also reported a 12.1% increase in GAAP earnings per share, to $8.89, and return on invested capital of 22.2%.
3M's Business Model
Beyond Scotch Tape (and the more contemporary, but equally revolutionary, Post-It Note), 3M produces an almost incomprehensible 55,000 items. The company organizes those manifold operations into five segments: Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer.
- The company posted net sales of $32.8 billion in 2018.
- Constantly striving for innovation and new products, 3M invested more than $1.8 billion in R&D in 2018.
- 3M generates revenue from sales of about 55,000 products across five segments: Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer.
3M's Industrial Business
Dwarfing all the other segments is 3M’s Industrial operations. Industrial sales totaled more than $12.2 billion in 2018, constituting 37.4% of total sales and an increase of 3.4% over 2017. It’s all but impossible to come up with a representative list of 3M’s industrial offerings, in part because there are so many of them. Membrane switch spacers? Foam fabricators? Yes and yes. The former is a layer that goes between other layers in, say, the keypads of the cardio machines at your gym. The latter is used to make gaskets and soundproofing insulation. These are the modern conveniences that most of us first take for granted and then, if we’re feeling thoughtful, marvel at. Go one step further and ask, “Who actually makes this stuff?" and more often than not, 3M will be your answer.
3M's Safety and Graphics Business
Under Safety and Graphics operations, you won't find products, but you will find enhancements that make those products functional, like the reflective sheeting on highway signs or the roofing granules that keep the interior of your house insulated. While the reason for pairing "safety" and "graphics" into a single 3M business segment has been lost over time, the value of this product line hasn't. All told, Safety and Graphics represents about 20.8% of 3M’s total sales as of 2018, with net sales in this segment of $6.8 billion. This marks a 9.5% increase over 2017.
3M began as the Minnesota Mining and Manufacturing Company, a mining operation.
3M's Electronics and Energy Business
3M’s true genius is in adding value to already marketable products made elsewhere. Instead of making computer screens, 3M's Electronics and Energy sector makes the glare filters that cover them. Unless you’re an unusually passionate follower of inkjet printing, you probably don’t give the flexible circuits inside the cartridges a second thought, but that's exactly the kind of hidden function 3M specializes in.
From power cables to pressure-sensitive resins, most of 3M’s Electronics and Energy products are far removed from everyday consumer use. Even so, the Electronics and Energy sector accounts for 16.7% of 3M’s total revenue, or about $5.5 billion in sales for 2018. 3M is the leading company in the U.S. for pressure-sensitive tape as of July 2019, producing products for over 25% of the American market.
3M's Health Care Business
Unlike Electronics and Energy, 3M’s Health Care business includes recognizable items, such as surgical drapes and teeth whiteners. But even in a realm as specialized as healthcare, 3M still runs the gamut. Health Care products include everything from coding software and metered-dose inhalers to stethoscopes and personal-use items. That last category includes “invisible” tooth braces, skin cleansers, and antiseptic foam. Health Care comprises about 18.4% of 3M’s total sales, with $6 billion in sales for 2018.
3M's Consumer Business
Unsurprisingly, 3M’s Consumer operations include office supplies. That’s in addition to other products that you may not associate with the 3M brand, but likely encounter in everyday use, such as air conditioner filters, bandages, sponges, shower pads, and many of the insulation products that line snow boots and winter coats. Less prominent but equally important, 3M produces household swabs that determine lead levels and stainless steel skirtings, which make the perfect holiday gift for the tough-to-buy baseboard installer on your Christmas list.
Despite its stature, Consumer operations is the smallest of 3M’s segments. The Consumer business represents 14.6% of 3M’s entirety, with net sales of $4.8 billion in 2018. The Consumer segment also saw its sales grow at the slowest rate last year; sales in this segment increased by just 1.4% year-over-year.
3M operates manufacturing facilities in more than three dozen countries around the globe.
Like many of the largest legacy companies today, 3M’s growth does appear to be decelerating. Sales have increased by relatively small amounts over the last few years, from $30.1 million in 2016 to $31.6 million in 2017 to $32.8 billion last year. Net income attributable to 3M seems to have approached its limit as well, falling from $5 billion to $4.8 billion in 2017.
As a true international player, 3M’s reach encompasses every continent. Sales are concentrated mostly at home, with about 40% of worldwide sales occurring domestically.
Big Goals for the Future
In recent years, 3M has embarked on a large-scale reshuffling of its business model, moving from 40 different business lines to 23. In 2018, the company sold off its communication markets business in an effort to further streamline. Investors should expect that 3M will continue to make adjustments along these same lines into the future. Through 2023, 3M has financial goals including 8-11% growth in earnings per share and 3-5% organic sales growth, among others.
3M's uniquely varied lines of business are both a tremendous advantage and also a challenge. Unlike highly specialized companies, 3M does not focus its efforts entirely in one area. As a result, 3M's product offerings are diversified and resilient in the face of major changes in any one area. On the other hand, though, because 3M is involved in production in so many different industries, it must work that much harder to ensure that its products remain relevant across many channels.
Because many of 3M's products are ancillary items designed to improve the performance or marketability of existing products, 3M is subject to changes in many industries. 3M also faces competition from a huge number of rivals, given its broad focus across industries. Similarly, a change in global economic circumstances could mean significant turbulence in 3M sales. With so many products in its arsenal, 3M is also dependent upon clear and controlled lines of components, compounds, distribution, and more.
A History of Success
3M has been part of the Dow Jones Industrial Average since 1976, which is longer than all but five of the index’s other 29 components. That fact alone indicates 3M’s formidable ability to adapt to change in an endless milieu of creative destruction. The company specializes in businesses in which few aspiring entrants have either the patience or the capital to build market share. 3M’s profit centers are myriad. Putting it all together, it’s a safe bet that 3M will still be flourishing once many of the latter-day Dow components have come and gone.