The Rising Influence of Rising Affluence

[DewDiligence]

CEO’s Growth Pitch for 3M Proves Hard Sell

[This piece from Monday’s WSJ presents the bear case for 3M. The fact that expectations are so low is a good thing for longs, IMHO. See #msg-60356285 and #msg-54817180 for related stories.]

http://online.wsj.com/article/SB10001424052970204624204577176873082751682.html

›JANUARY 23, 2012
By JAMES R. HAGERTY

When the normally ebullient George Buckley delivers 3M Co.'s fourth-quarter results on Thursday, he risks winding down his career on a feeble note.

The St. Paul, Minn., conglomerate, slowed by weakness in Europe and sluggish demand in some electronics markets, is expected to fall far short of its ambitious sales-growth goals.

That's a setback for Mr. Buckley, a native of Sheffield, England, and 3M's chief executive, who has sought to supercharge the company's shares by touting its growth potential.

Mr. Buckley, who trained as an electrical engineer, has worked hard to excite investors by talking up what he calls 3M's "whiz bang" technologies in such areas as adhesives, films and coatings used in cars, computers and medical supplies.

But while he is credited with firing up 3M's renowned research labs to rush out more products, his cheerleading has failed to persuade Wall Street that the company—best known for such items as Scotch tape and Post-it notes—is a hot growth story. [Can’t someone *ever* write a story about 3M w/o mentioning Post-it notes?]

He may be running out of time. Mr. Buckley, who headed boat maker Brunswick Corp. before becoming 3M's chief in 2005, is due to step down next month when he turns 65, the company's normal retirement age for executives, unless the board extends his contract. One possible successor is Inge Thulin, a Swede who has worked at 3M since 1979 and was named chief operating officer last year.

Douglas Ward, who worked at 3M for nearly 30 years, including senior roles in manufacturing of optical products, before departing last year, credits Mr. Buckley with increasing the emphasis on research and development, in part by frequently visiting the company's labs. Tim O'Neil, a marketing and sales manager at 3M for about 15 years until he joined another company in 2011, says he found Mr. Buckley "incredibly intelligent" but said his growth goals seemed like too much of a stretch.

Some executives at 3M "felt like we bit off more than we could chew," said Mr. O'Neil, who added that he nonetheless sees a bright future for 3M.

A 3M spokeswoman said Mr. Buckley wasn't available to comment.

The company's near-term prospects appear lackluster. The mean Wall Street fourth-quarter earnings estimate for 3M is $1.31 a share, up from the $1.28 a share it reported a year earlier, according to FactSet Research Systems. If not for the company's stock buybacks, though, the expected per-share earnings would be down slightly from a year earlier.

3M's organic sales growth, which excludes the effects of recent acquisitions, price changes and currency fluctuations, will be 3% this year, according to Barclays Capital forecasts, down from an estimated 4% in 2011. For the past several years Mr. Buckley has trumpeted a goal of raising average organic growth to between 7% and 8% a year from the 3M's previous norm of around 4%.

"It's an incredibly impressive company," regularly churning out inventions, said Scott Davis, an analysts at Barclays. "But it's so diverse and large that growing [sales] more than 5% a year is tremendously difficult. In the end, 3M's core competency might not be growth." [Probably one of the most vacuous best soundbites I’ve ever heard from a sell-side analyst, and that’s saying a lot.]

Instead, Mr. Davis said, 3M should be emphasizing such strengths as its profit margins, global reach and reliable dividends. The company has increased its dividend every year for more than five decades.

The 3M spokeswoman declined to comment on those suggestions.

As of Friday, 3M shares…were trading at 13.6 times expected 2012 earnings, compared with a median of 15.3 for a peer group of 22 other industrial stocks, Mr. Davis said. A growth stock would trade at 16 to 20 times earnings, he said.

At a meeting with investors in December, Mr. Buckley wasn't ready to abandon his elusive organic-growth goal. "I don't think we should give up on that right now," he said. In a rambling speech quoting Winston Churchill and George Bernard Shaw, he argued that the growth trend can be thrown off by sudden changes in customers' willingness to hold inventories.

"We must not be confused into thinking the growth model is broken when this happens," Mr. Buckley said. "It is only a transient."

Even a weak economy has its positive side, he said, predicting a "rapid acceleration of petty crime" in the U.S. "It's a business opportunity for 3M," Mr. Buckley said: The company makes safety products including electronic access-control systems and fingerprint readers.‹