3M Co.'s (MMM) healthcare business could be a key to its
prognosis this year.
The healthcare unit, which makes products ranging from bandages
and braces to inhalers and other drug-delivery systems, accounts
for about 20% of 3M's operating profit and has quietly become one
of its best-performing divisions.
The degree to which the unit can hold up amid the slumping
global economy will play a big role in determining whether 3M comes
in near the top or bottom end of its lackluster overall forecast
for 2009, which calls for a 3% to 12% slide in per-share
earnings.
"Thank God we've got a healthcare business," Chief Financial
Officer Patrick D. Campbell quipped during 3M's outlook meeting
last month.
The healthcare unit - 3M's second-largest division by revenue -
grew operating income by 17.2% in the third quarter on a 10.7% rise
in sales. Operating income was up 8.7% company wide, excluding
items, on a 6.2% sales increase.
In addition to healthcare, 3M's broad product portfolio spans
the industrial, transportation and electronics sectors, and the
company reaps more than 60% of its estimated $23.2 billion in
annual sales overseas.
The St. Paul, Minn., diversified manufacturer declined to make
an executive available for this story, citing proximity to its
fourth-quarter earnings release on Jan. 29.
But Campbell made clear during the December outlook meeting that
3M is banking on at least "decent" healthcare performance in 2009
as the economic downturn saps many of its business lines and
reduces overall sales volume by a projected 3% to 7%, not including
acquisitions.
He didn't precisely forecast the healthcare business, saying
only that it likely will continue to perform above the company
average.
Analysts and investors also are counting on continued solid
performance, at least on a relative basis, from 3M's healthcare
business. They point to the unit's reliance on "consumables," such
as surgical supplies, rather than on sales of big-ticket medical
devices that might be vulnerable to cancellations amid the economic
slump.
"Hopefully, [the healthcare unit] acts as a positive to offset
some of the negatives that are going to take place in the first
part of the year with some of [3M's] other businesses," said Peter
Klein, a portfolio manager at Fifth Third Asset Management Inc.,
which owns a 3M stake.
To be sure, plenty of other factors will play into 3M's 2009
results, not the least of which will be the ultimate magnitude and
duration of the global economic slump, as well as the direction of
foreign currency exchange rates.
Meanwhile, 3M stock - trading Thursday afternoon around $53.10 a
share - doesn't appear poised for a major near-term rebound
regardless, after tumbling 32% last year and 7.7% so far in
2009.
The shares are valued at about 12 times the company's
anticipated 2009 earnings, putting them in the mid-range of
multi-industry peers such as General Electric Co. (GE) and Danaher
Corp. (DHR), valued 9.3 and 13.4 times estimated earnings,
respectively.
Still, the healthcare unit clearly represents something of a
boon to 3M amid the prevailing economic gloom, with the potential
to at least mitigate the degree of decline in the company's results
- and thus the stock slump - until a broad recovery gains
traction.
"It can definitely help," said Sterne Agee analyst Nicholas
Heymann, who has a hold rating on 3M. "It's certainly one of the
brighter segments [for 3M] amid a tough environment."
3M has been beefing up the unit since announcing the sale of its
big but slow-growth pharmaceutical business in late 2006. 3M bought
nine small to mid-sized healthcare companies in 2007 and 2008,
adding to its offerings and expertise in areas such as surgical
supplies and orthodontics.
The moves appear to have paid off, with sales in 3M's healthcare
segment climbing about 12% through the first nine months of 2008,
compared to a 6.7% annual growth rate for the unit in 2006.
Analysts generally like the strategy, although some have noted
that 3M's exposure to cosmetic dentistry could put the brakes on
the performance amid the downturn.
Cosmetic dentistry "is great when people have dough to spend"
but may suffer when they don't, Heymann said.
3M executives have acknowledged that there could be a dip in
"discretionary" dental work this year, although they have said they
expect it primarily in the U.S. rather than overseas, where
governments play a bigger role in providing healthcare.
Regardless, Heymann estimates cosmetic dentistry at no more than
6% of 3M's healthcare business. He expects overall sales in the
healthcare unit to be off about 3% in 2009, hardly results to write
home about but much better than what he anticipates will be a 10%
slide in annual sales for the company as a whole.
Harrison Grodnick, a senior portfolio manager at Minneapolis
Portfolio Management Group, called the performance of the
healthcare unit illustrative of one of the things he likes about
3M: The conglomerate spans many sectors, which among other things
means it usually has exposure to something doing relatively
well.
"I'm more generalist in my view of 3M," said Grodnick, whose
firm owns about 450,000 3M shares. "They have diversified products
and chose to go into areas that are going to be growth-driven for a
lot of years."
While the stock has fared poorly recently, Grodnick cited 3M's
clean balance sheet and said investors who weigh in at current
levels are likely to be rewarded long term, although he stopped
short of forecasting a price target.
"It could be one of the great investments out there" over the
next three to five years, he said.
-By Bob Sechler, Dow Jones Newswires; 512-394-0285;
bob.sechler@dowjones.com
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