3M focused on growth, even if it has to buy it

With two acquisitions totaling more than $1 billion announced last week, 3M Co. appears to be jumping back on a growth track after spending the past couple of years scaling back during the recession.

The proposed purchases of Cogent Inc., a Pasadena, Calif., manufacturer of fingerprint identification systems, and Attenti Holdings SA, an Israeli maker of electronic tracking devices, fit neatly into the track-and-trace business, which 3M entered in 1999 and targeted as a prime growth opportunity about four years ago. The Maplewood-based giant said both Cogent and Attenti have annual growth rates of more than 20 percent, exactly the fuel 3M is seeking to boost its overall top line.

Acquisitions, capital investments and research and development spending all tailed off in 2009 as 3M cut -- including eliminating about 4,000 jobs -- and tried to preserve cash during the recession. Sales also plummeted, falling 8 percent to $23.1 billion.

Now 3M seems ready to reverse the tide and has turned on its cash spigot again. Late last month, CEO George Buckley said 3M could double the amount it previously said it would spend this year on acquisitions to more than $2 billion. Last year it spent just $69 million buying other companies.

It's also increasing R&D spending by $100 million this year to $1.4 billion. R&D spending has fallen to 5.6 percent of sales the past several years, compared with previous years when it accounted for at least 6 percent of revenue.

The plans return 3M to a strategy to transform itself from an industrial manufacturer whose growth moves in lockstep with GDP to a higher-growth concern. That strategy had largely been sidetracked during the recession, but speaking at an investors' conference in the New York last week, Chief Financial Officer Patrick Campbell reminded analysts of the game plan laid out by Buckley in 2006, about six months after he took the helm at 3M.

Campbell also claimed the company has already been progressing toward its goals.

"The quality of the [new product] pipeline has broadened and improved considerably," said David Begleiter, an analyst at Deutsche Bank Securities in New York. He said Buckley realized the growth potential even in older businesses where research and development spending had been cut back under predecessor James McNerney. One example, Begleiter said, is 3M's adhesives business that has seen its sales rejuvenated with new products like optically clear adhesives used in electronic devices like iPads and iPhones.

Expanding the company's footprint in faster-growing emerging economies overseas has also been part of the plan to reduce 3M's dependence on GDP. International markets last year accounted for 63 percent of overall sales, up from 60 percent in 2006, and the goal is to boost them to about 70 percent of total revenue by 2011. A higher percentage of capital expenditures has been aimed at international markets -- 50 percent in 2009 vs. 40 percent in 2007 -- with recent projects that include a new aerospace plant in Poland and an expansion of facilities in Singapore.

In his comments to analysts last week, Campbell said the company can't build factories fast enough in places like China to keep up with growing production needs.

3M's organic sales, which don't include price increases, currency effects or contributions from recent acquisitions, fell 9.5 percent in 2009 after falling 2.4 percent in 2008. But Campbell said the company remains confident of meeting the goal laid out in 2006 for organic sales growth of 7 percent to 8 percent a year, or about twice the growth rate of GDP.

The results for this year look promising. Organic sales rose 19 percent in the first quarter and 18 percent in the second, fueled largely by strong sales in emerging markets like China, India and Latin America and increased demand for consumer electronics.

Even so, 3M continues to battle skepticism on Wall Street that the gains simply reflect favorable comparisons against last year's lackluster results or short-term increased sales from customers that only are restocking their inventories.

3M shares have fallen about 1 percent so far this year, while the Standard & Poor's 500 industrial index has risen about 5 percent. Last month, a J.P. Morgan Chase analyst cut his rating on the stock from neutral to underweight, expressing doubts that 3M can maintain the first two quarters' positive momentum.

But most analysts who follow 3M are keeping their buy ratings on the stock. Nicholas Heymann, an analyst at Sterne, Agee & Leach in New York, recently returned from a visit to 3M that included a stop at the company's Innovation Center.

"We returned with a stronger conviction that 3M's future higher earnings growth rate will almost surely ... force an upward adjustment in 3M's long-term growth rate and relative valuation," he wrote in a research report.

Deutsche Bank's Begleiter said the next two quarters will be critical for 3M to prove that it can sustain its recent growth rate. "This is when the tide goes out and you find out whether you're still wearing a bathing suit," he said. "I happen to think 3M has a pretty good bathing suit."