3 Cheers for 3M

 | Apr 30, 2014 | 6:09 PM EDT  | Comments
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What makes for a great conference call? What do investors want to hear right now after this brutal high-multiple bruising? What information must an investor have to make a solid decision whether to buy or sell a stock?

If you want to know the answer to that, and so much more, you have to go listen to the 3M (MMM) earnings call because Inge Thulin, the masterful CEO, puts on clinic, showing you everything you need to know in a clear and concise fashion for the most important communication form available to a company.

That's why I want to do a textual analysis of this last quarter's call because you need to know what to look for and what to listen for, and you want the material to be as great as 3M's because this is what anyone would call a "core" portfolio position -- one that you must think long and hard about before you sell it.

Thulin grabs you right from the get-go: "The first quarter was strong for 3M marked by organic growth in all business groups and across all geographic areas." Thulin knows that there are a lot of skeptical analysts out there who believe that growth is "manufactured" or that it's just simply purchased, while the core business languished. Thulin tells you that's not the case with 3M. The fact that he said "all geographic areas" alerts you that 3M's businesses are transcended local gross domestic product issues in his territories and 3M's in every territory.

"We posted record sales and returned record cash to shareholders, while also increasing investments in R&D and commercialization to reinforce our foundation for long term success." Here Thulin's giving you the insights you need for sustainability and the firm's priorities. First, the quarter's important and it's been delivered in record fashion. But the record wasn't accomplished by skimping on investments for the future. As important, the excess money gets returned to the shareholders and given how much money there is in the till because of the excellent quarter, the shareholders got more than ever.

We always want to see double-digit earnings growth, and Thulin tells us 3M generated an 11.2% earnings increase. You always want record sales for that quarter (there might be seasonality in a business, so the quarter itself might not be the strongest of the year.) Thulin says 3M  had the "highest first quarter in 3M history." He then breaks down the organic growth so you know, again, that the sales weren't just bought by adding companies to the fold: "Organic growth was 4.6% paced by our health care business at 6%, industrial and safety and graphic each grew 5% organically."

These are not high-growth categories per se -- these are not social/mobile businesses, so that's incredibly impressive.

Now, a glitch: We saw organic growth in each geographic area led by Latin America/Canada at 7% each, Europe/Middle East/Africa grew 4% followed by the United States at 3%." That's typical growth out of Asia, spectacular growth from Europe -- a real turn -- and amazing from Latin America Canada, as even the best companies compared at low single digits. But the U.S. down 3%? That was inconsistent so you know Thulin's going to have to explain that shortfall. And, of course, he does, later in the show!

You always want to hear that an organization is getting more profits out of each sales dollar than ever before. Thulin tells you "operating margins were again strong at nearly 22%, up 30 basis points from last year." So margin improvement off a very high base -- always good to see.

I loved this gem still in the preamble: "It remains a good time to be a 3M shareholder. The company returned $2.3 billon to shareholders in cash dividend and share repurchases. We increased our first quarter dividend by 35% which marked out 56th consecutive annual increase." Think of this: All hell is breaking out among the highfliers. They are issuing shares, hiring like mad. Not focused on profits. Thulin's 3M? Totally committed to the dividend and making it bigger, perfect for those on a fixed income. That's a huge boost and a magnificent record of consistency. This is a port in the storm of what's around us. 

He then reaffirms the forecast. He can't take it up, there's a currency hit coming -- not his fault. But with one quarter down, everything is on plan.

Thulin turns the call over to Chief Financial Officer David Meline for more salient details -- there is not a moment wasted on this call. Meline immediately lays out the tactical goals: "Organic growth remains our first priority." Again, that's the best judge of an enterprise. "We will continue to invest in Capital Expenditures, research and development and commercialization capability." And he adds they are looking for strategic acquisitions. Good, money goes toward everything the business needs and then only the excess goes to the shareholders. There happens to be a lot of excess because the company's doing so well.

Then Meline calls out all of the businesses that grew at strong double-digit levels: Purification, automotive original equipment and personal safety get noted. So do health care in emerging markets, especially health information systems, food safety and drug delivery. All of these are strong secular growth areas and I love that the company is a dominant force in them.

Then we learn from another executive about the weakness in the U.S.: road construction, retail and industrial distribution. They are all explained away intelligently and the argument is bolstered by the U.S. health care business, which was very strong with terrific organic growth. It seemed like a reasonable excuse. Of course, you want no excuses but too many fabulous companies like MMM have blamed the weather for me to dismiss it.

It's not unusual to hear that a company has a big buyback, like many a technology company, but when you look at the share count, it's gone up, not down. Not 3M. The company's average diluted shares, we learn, have declined by 4% over last year. They aren't issuing options and lining their executive's pockets like so many tech companies that we are all sick of by now.

Finally, there's the true greatness of 3M: innovation. As Thulin puts it, "Innovation is it the heartbeat of 3M. It drives what we do every day and allows us to create even greater value for our customers. Innovation generated new growth and is the key to our long track record of generating premium returns throughout the business."

How can it be measured? 3M knows how to do that, too, with my favorite statistic of all: "One third of our revenue in 2013 came from products created within the last five years and we are targeting 37% by 2017." They are doing it with 45 innovation centers around the world. It's not a hollow saying, some holistic mantra. It is a "put food on the table of shareholders" real deal.

You want to know what products these might be? Go to the website, they are all there, and have some fun with the periodic table of offerings. It is an amazing treat.

If all companies were like 3M and all CEOs like Inge Thulin, this wouldn't be that tough of a job. That doesn't mean they can't make mistakes. It doesn't mean that 3M can generate the kind of short-term performance that so many stocks do. It does mean that long-term, though, it can be an ideal stock to own. And in a world where stocks can be cut in half on a whim, 3M stands out as a company that's more in control of its own destiny than just about any other I follow.

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