We're raising our fair value estimate to $180 per share from $167 for the wide-moat firm.
After wide-moat 3M
’s strong first-quarter results, we’re raising our fair value estimate to $180 per share from $167. We added $3 due to time value of money and better-than-expected organic revenue growth in the industrial and electronics and energy segments. The remainder came from lowering our U.S. federal statutory tax rate assumption to 25%, consistent with Morningstar’s belief that U.S corporate tax reform is likely in 2018.
Barbara Noverini is a senior equity analyst for Morningstar.
3M’s revenue rose 3.7% year over year, to $7.7 billion, 4.6% when excluding divestitures and foreign exchange. The electronics and energy segment led the portfolio with surprising strength, growing sales 11.5% organically after seven consecutive quarters of year-over-year declines. While the strong comparison was partially aided by a weak prior period, management also pointed to improving demand in the consumer electronics vertical, particularly in display materials. New business wins on OEM platforms in the quarter give us comfort that the segment can sustain its positive sales trajectory. Industrial segment sales also surprised to the upside, as 3M’s automotive OEM business grew 400 basis points faster than the pace of global auto and light truck builds. In addition, 3M’s legacy abrasive and adhesive businesses each grew sales midsingle digits organically. The consumer segment was the only underperformer, with sales declining 1.2% year over year due to challenges in the U.S. office products retail channel. However, strong demand for home improvement products, such as Command and Filtrete, offset some of the segment’s weakness.
Operating margins declined 100 basis points, to 23.1%, in the quarter, as improving sales prompted management to invest $136 million in strategic initiatives meant to enhance productivity (such as facility and supply chain rationalization) and accelerate growth. Excluding this spending revealed solid year-over-year operating margin expansion of 80 basis points.
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