3M: Strength Through Diversification

3M Company (NYSE: MMM), formerly known as Minnesota Mining and Manufacturing, created some of the most iconic brand name products in the American economy: Scotch tape, Post-It Notes, Scotchgard and others.

3M was a profit powerhouse for much of the 20th century, but is it adapting well to the changed environment of the 21st century? The answer appears to be yes.

The company has a significant presence in many industries, including health care, security and protection services, and communications. Its revenues and profits have grown with admirable consistency for decades, yet its price-to-earnings (P/E) ratio is only about 19. The market cap is $83 billion. The company is a component of the Dow Jones Industrial Average and the S&P 500.

At the end of July, 3M reported second-quarter earnings per share (EPS) of $1.71, an increase of 3 percent versus the second quarter of 2012. Revenue grew 2.9 percent year-over-year to $7.8 billion. Organic local-currency revenue grew 2.3 percent and acquisitions added 1.9 percent to revenue. Currency impacts reduced revenue by 1.3 percent year-over-year.

“This was a good quarter for 3M, with strong performances across the portfolio,” said Inge G. Thulin, 3M’s chairman and chief executive officer. “Four of our five business segments achieved positive organic growth and posted operating margins above 21 percent. Our employees executed well in the face of continued slow economic growth.”

3M has grown through acquisitions as well as expanding markets. In April 2012, it acquired CodeRyte. In September 2012, it acquired the business of Federal Signal Technologies Group (FSTech) from Federal Signal Corporation. In November 2012, it acquired Ceradyne.

Thulin stated last year that he is planning to increase the research and development (R&D) budget from 4 percent of revenue in 2011 to 6 percent in 2017. He believes, correctly, that R&D is essential  for a company like 3M to maintain its position.

3M is constantly reinventing their own products to keep up with the changing marketplace, and also with new regulatory requirements. Scotchgard was reformulated to eliminate perfluorochemicals, and even the humble Post-It Note went through a redesign.

The company has been increasingly involved in the expanding security system market: radio-frequency identification, high-tech tolls, license plate recognition and other new security tools.

The market for touchscreens has exploded in recent years, as smartphones and other mobile devices have become an integral part of the daily round. 3M sells components for the touchscreens millions of Americans use every day, and it also makes touch displays that are geared toward more commercial or industrial applications that include everything from point-of-sale systems to casino gaming.

A physical manifestation of the company’s commitment to R&D is a large new addition to the company’s Maplewood, Minnesota campus: a new $150 million R&D building that will replace two aging labs. The state-of-the-art facility should be completed by fall of 2015 and is expected to house 700 existing scientists and researchers, said 3M Chief Technology Officer Fred Palensky. The project will include a four-story R&D center dedicated to technology research for three of 3M’s businesses: electrical and energy, safety and graphics, and industrial.

Five businessmen founded 3M in Two Harbors, Minnesota, more than 100 years ago. The company later moved to St. Paul, where it remained for 52 years before outgrowing the campus and moving to its current headquarters in Maplewood.

In the United States, 3M has nine sales offices in eight states and operates 74 manufacturing facilities in 27 states. Internationally, 3M has 148 sales offices. The company operates 93 manufacturing and converting facilities in 32 countries outside the US.

Some of the different industries where 3M products are widely used:

E-Publishing: 3M’s eBook lending service was recently integrated into Innovative Interfaces’ Encore discovery application. This latest integration is expected to improve the reading experience while offering a user-friendly application. It allows users to discover, place holds, and check out eBooks within the Encore interface. The user experience is further enhanced through the personalized browse option and the patron page, which allow users to see what items they have checked out or are on hold.

Power utilities: The company recently announced the Cold Shrink QS4 Integrated Splice for the utility market.  Built upon 3M’s field-proven QS-III Cold Shrink splice body, the new QS4 splice is designed to meet the toughest industry standards. Once installed, a cold shrink splice creates an electrical interface without sealants, adhesives or additional tools. New features include an integrated design that simplifies installation.

Air and water purification: 3M is also the maker of Filtrete air filters and water filtration products, and has been capitalizing on the trend toward healthier homes. The division recently held a contest that invited homeowners to detail how they’ve been fighting mold and similar problems. Filtrete will provide the winning family a home inspection and $30,000 cash to put toward repairs and renovations.

3M’s water purification system is the first to achieve Water Quality Association (WQA) Sustainability Certifications under the association’s new product sustainability standards. The products include water filtration products for the home and water appliances. 3M Purification joined a task force of other leading industry manufacturers and suppliers to assist the WQA in developing a new suite of sustainability standards for drinking water treatment products.

With a diverse array of well-established, nuts-and-bolts products and a long history of smart management, 3M is a good match for anyone’s growth portfolio.

Thomas Scarlett is an investment analyst at Personal Finance and its parent website Investing Daily.