Here's How 3M May Be Failing You

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Margins matter. The more 3M (NYS: MMM) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, comparisons with sector peers and competitors, and any trend that may tell me how strong 3M's competitive position could be.

Here's the current margin snapshot for 3M and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 3M47.2%20.9%14.6%
 General Electric (NYS: GE) 38.5%13.6%9.9%
 Tyco International (NYS: TYC) 37.9%11.5%9.3%
 Honeywell International (NYS: HON) 24.4%10.4%7.5%

Source: S&P Capital IQ. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where 3M has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and the last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect and what to watch.

Here's the margin picture for 3M over the past few years.

anImage

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable with the FY results preceding them. To compare quarterly margins with their prior-year levels, consult this chart.

anImage

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 49.5% and averaged 48.3%. Operating margin peaked at 22.5% and averaged 22.1%. Net margin peaked at 16.8% and averaged 15.3%.
  • TTM gross margin is 47.2%, 110 basis points worse than the five-year average. TTM operating margin is 20.9%, 120 basis points worse than the five-year average. TTM net margin is 14.6%, 70 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, 3M has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Have an opinion on the margins at 3M? Let us know in the comments section below.

At the time this article was published Seth Jaysonhad no position in any company mentioned here at the time of publication. You can view hisstock holdings. He is the co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio.Motley Fool newsletter serviceshave recommended buying shares of 3M. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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