3M Can't Satisfy the Street

Investors sold the stock Tuesday after the company reported earnings

The century-old giant 3M (MMM), which makes products ranging from Post-it notes to Scotchgard Fabric Protector, has been struggling to keep growing as the U.S. economy slows. The manufacturing conglomerate continues hunting for ways to sell new products in hot markets. But when 3M announced its results of recent months on Jan. 30, skeptical investors sold the stock.

The St. Paul (Minn.) company's net income amounted to $1.2 billion during the three months ended Dec. 31, up 58% compared to the same period last year. Those results include things like a $354 million net profit related to the sale of the company's global branded pharmaceuticals business in December.

Excluding the impact of that sale, 3M's earnings per share during the quarter amounted to $1.10 per share. The mean analyst forecast for the company's earnings per share had been for $1.14, according to the San Francisco research firm StarMine.

Some of 3M's products have already been around too long to grow their sales much further in the U.S. To make its sales numbers explode, the company has to get in on the latest innovations. Some of 3M's newer products include optical films for LCD televisions, Scotch Transparent Duct Tape, and a new family of Scotch-Brite Cleaning Products designed to work on different kinds of cleaning jobs. 3M's sales during the fourth quarter amounted to $5.8 billion, up 8.6% year over year.

"Looking ahead, despite what appears to be slightly moderating economic growth worldwide, I am very optimistic about the future of our company," 3M's CEO George W. Buckley said in a press release Jan. 30. "We will continue to drive our growth agenda."

Buckley is trying to invest at a faster pace in things like research and development of new products, sales and marketing. He's also been looking for companies to buy in new markets; in one recent example, 3M announced on Nov. 28 that it completed its acquisition of the U.K.-based Biotrace International, which supplies microbiology products that are used for testing food safety.

Buckley expects such efforts to soon bear fruit and promises to have better profits. He says 3M's earnings per share will range between $5.20 and $5.45 during 2007, including items like stock options expensing and the sale in the first quarter of the company's branded pharmaceuticals business in Europe. During 2006, the company had earned $5.06 per share including items.

Investors remained dubious and sold 3M's stock 4.4% to $75.48 per share in early trading on the New York Stock Exchange Jan. 30. In one example of how market observers responded to 3M's press release, Standard & Poor's Equity Research lowered its 2007 earnings per share estimate to $4.70 from $5.05, explaining that the company's operating margins were weaker than expected across most of its businesses. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Cos.)

But 3M is no stranger to overcoming challenges. Back in 1902, the company's founders at the Lake Superior town of Two Harbors, Minn. had thought first of mining a mineral deposit. When their mining effort didn't have any luck, the new Minnesota Mining and Manufacturing Co. simply moved on to try sandpaper products instead. By the 1920s they were selling tape. Now the company has grown to be a global giant, generating more than $20 billion in annual sales.

"Innovation and strong manufacturing capabilities have long been the trademarks of 3M," Morningstar analyst Scott Burns said in a research note Dec. 14. "We expect around 6% internal growth over the next several years and have not factored the impact of potential future acquisitions into our valuation." Burns added the caveat, of course, that he's assuming the company will continue creating new and profitable products.

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