On Thursday, 3M (click ticker for report: ) reported fantastic fourth-quarter results that showed significant improvement from relatively disappointing third-quarter performance, released in October.
The firm’s sales during the quarter expanded 4.2% (its best in 2012), to $7.4 billion, an all-time fourth-quarter record. Organic sales increased at a slightly faster pace thanks to solid performance in its consumer/office, display/graphics, and healthcare segments, where organic local-currency sales growth came in at 8.7%, 8.3% and 5.9%, respectively. Only its safety, security, and protection services segment declined organically.
Revenue in the US jumped more than 5%, while sales generated from Europe, Middle East, and Africa (EMEA) fell a modest 1%–not bad considering the negative news flow from the Eurozone. And most importantly, China was a significant contributor to local currency sales growth, expanding over 16% in the period (it did benefit from an easy comparison, however). Still, on its conference call, 3M seemed optimistic about the country’s expansion potential into 2013:
And as you saw, we had growth in the quarter of 16% in total. Our base business, which is excluding electronic was like 10%, so that’s a good uptick for us. And, I would say then and that’s a quarter for us last year, right? 2012. Looking into the 2013, our base business, I would say will continue in the same mode as we saw then. We don’t know yet in terms of electronics.
So, electronic maybe will still be a little bit of a challenge as we move into the year, but for the base business we see recovery coming and we feel optimistic about that, but we’re still cautious as you said, because when you look upon quarter-by-quarter, it’s not the old China if you like, right? That’s a different base line that we need to grow out from, but we can see recovery coming in base business and it’s a big portion for us, so we sequential improvement in that as we move ahead for the base business going into Q1. Electronic is little more a question mark for us as we speak.
3M’s fourth-quarter operating income came in at $1.4 billion (up 5.8% from last year’s quarter), while operating margins were 19.5% (up 80 basis points on a year-over-year basis). Net income totaled $991 million (up 3.9% from last year’s quarter) and free cash flow came in at $1.23 billion (124% of net income). All things considered, it was a very solid quarter.
Looking ahead, 3M affirmed its previously-issued full-year expectations. The company anticipates organic local-currency revenue growth of 2-5%, earnings per share to come in the range of $6.70-$6.95, and free cash flow conversion to be in the range of 90-100%. But while we think such guidance is achievable, we’re not ready to initiate a position in the portfolio of our Best Ideas Newsletter at current levels. We think a more attractive entry point in 3M lies in the future (on the basis of valuation).