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3M: A Company for All Seasons?

Thanks to growing sales overseas and cost-cutting efforts, this company's prospects for the new year are bright.



From Scotch tape to Littman stethoscopes to reflective stop signs, 3M does it all. Well, maybe not everything, but the company (symbol MMM) makes more than 50,000 products.

Even more impressive than 3M's array of wares, however, are its prospects for 2008.

The St. Paul, Minn., diversified giant forecasts double-digit growth in sales and earnings per shares next year. Thanks in part to robust overseas operations and favorable foreign-exchange rates, 3M projects that earnings will rise 10% next year, to $5.44 to $5.47 a share.

Sales from existing businesses are expected to grow 5% to 9%, with acquisitions adding more than 3 percentage points to those estimates, analysts say. Based on current exchange rates, the weak dollar is expected to add 2 to 3 percentage points of growth.

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"3M is rejuvenated and the new strategy is working," says Deutsche Bank Securities analyst David Begleiter. He credits the company for revitalizing its research and development, cutting costs and accelerating sales growth while maintaining profit margins.

Sales grew 10% in the first nine months of 2007, while gross margins (sales minus cost of goods divided by sales) increased slightly, from 22% in 2006 to 23% so far this year. Plus, the company has improved its pipeline of new products--everything from improvements in dental braces to spray starch that includes stain repellent. This is no small feat considering 3M's wide-ranging catalogue of goods.

For example, about 95% of the sales of the traffic-safety and commercial-graphics division, which makes light-reflective street signs and pavement markings, are products created less than four years ago, says Begleiter. The division is also benefiting from construction of new roads and bridges and repair of existing infrastructure in both developed and developing countries.

Product diversity inoculates the company against a slowing U.S. economy, chief executive officer George Buckley told investors on December 12. Plus, some of the company’s fast-growing businesses are in defensive segments of the economy, such as health care, security, transportation and education.

Rapid growth in emerging nations is clearly helping 3M. Sales to developing countries, particularly those in Eastern Europe, the Middle East and Africa, have grown 19% per year since 2002. More than 60% of 3M's $24 billion in revenue over the past 12 months has come from overseas operations.

What’s not to like? Optical film has underperformed for 3M. Earnings from this division are expected to fall 20% as the company seeks to sell more film at lower prices in the face of strong competition. But gains from other segments will offset the headwinds in film, Begleiter says.

The stock, which has a market value of $60 billion, looks attractively priced. The shares, which closed at $85.94 on December 26, trade at 16 times the $5.44 per share that analysts, on average, expect 3M to earn in 2008. That's below 3M's average historical price-to-earnings ratio of 19.

For 2007, the stock has gained 10%. Begleiter rates the shares a buy and has a 12-month price target of $105. They're certainly worth a look.



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