More Than Just Post-It Notes - finances and management of 3M - Brief Article

Kiplinger's Personal Finance Magazine, May, 2001 by Steven T. Goldberg

STOCKS Investors are banking on a GE alumnus to REINVIGORATE 3M.

MINNESOTA Mining and Manufacturing is the venerable industrial conglomerate are behind Scotch tape and Post-it Notes, two of the world's best-known brands. But these are infinitesimal parts of the 3M empire, which is involved in everything from specialized electronic circuits and fiber-optic cables to anti-cancer drugs. Indeed, 3M manufactures an astonishing array of products--some 50,000 in all--generating annual sales of $17 billion.

Trouble is, growth prospects for many of its lines, such as reflective materials for road signs and dental bridges and crowns, are just so-so. That's one reason that, after mirroring Standard & Poor's 500-stock index for much of the 1990s, the stock fell into a funk after topping $100 a share in 1997.

Lately, though, 3M shares have been clobbering the shaky market. The stock rocketed from $82 in September to $122 late last year, before retreating to its recent price of $108. Analysts attribute much of the run-up to the excitement over the naming in early December of James McNerney, 51, as chief executive officer. The appointment of McNerney, who had been one of three finalists to replace Jack Welch as CEO of General Electric, marked the first time the 99-year-old company had gone outside to fill the top job.

Hard-nosed management. The shake-up has whetted the appetite of some investors who wouldn't normally associate with the likes of a stodgy, slow-growing company like 3M. Spiros Segalas, manager of Harbor Capital Appreciation fund (see "Best Funds to Buy," on page 34), says he became interested in 3M because it had been mismanaged, a problem that he hopes McNerney will rectify. "They have a well-known franchise around the world," says Segalas. "They need some hard-nosed management to shake up the trees a little bit."

Sean Katof, assistant portfolio manager of Invesco's equity-income funds, expects McNerney to better deploy the more than $1 billion that 3M spends annually on research and development. He also sees plenty of room for cutting costs and running 3M's businesses more efficiently. Says Katof: "3M has the potential to be a GE without GE Capital," referring to GE's financial-services unit.

Under McNerney, 3M will be more willing than it has been to go outside to acquire new technology, says analyst Jeff Cianci of UBS PaineWebber. Its fiber-optics and microelectronics businesses are two of the fastest-growing parts of the company. So is its health care business, which has several promising cancer drugs in late-stage trials, as well as other drugs and medical devices on the market.

The bearish case. Not everyone is a believer. Lehman Brothers analyst Donald Zwyer expects the current economic slowdown to hurt most of 3M's units. After seven straight quarters of exceeding earnings estimates, 3M came up short in the fourth quarter of 2000. Zwyer says 3M's price-earnings ratio--21 based on consensus 2001 estimates of $5.03 per share--is too high for a company whose long-term profit-growth rate is pegged at 11% per year. --Reporter: ERIN BURT

SPOTLIGHT/3M

* Symbol: MMM

* Headquarters: St. Paul, Minn.

* Recent price: $108

* Market cap: $42.7 billion

* Annual dividend per share/yield: $2.40/2.2%

* Earnings per share: 1999:$4.21 2000:$4.68 2001:$5.03(e)

* Web site: www.mmm.com

* Shareholder services: 866-367-8625

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(e) estimate

(*) to March 15

SOURCES: First Call/Thomson Financial, Yahoo!