Tracking Firm Tracking Firm Presentation 3M (MMM)Presentation 3M (MMM)

Finance 6332 Finance 6332 InvestmentsInvestments

Presented by: Presented by: Vincent W. Wedelich Vincent W. Wedelich

P.E.P.E.

Firms Current Business Firms Current Business ModelModel

Expand Manufacturing CapacityExpand Manufacturing Capacity

Improve Supply ChainsImprove Supply Chains

Investment in core R&DInvestment in core R&D

LocalizationLocalization

AcquisitionsAcquisitions

Manufacturing Manufacturing capacitycapacity

Expand Number of overseas Expand Number of overseas manufacturing:manufacturing:– Four new plants are being Four new plants are being

constructed in China,constructed in China,– Two in PolandTwo in Poland– One each in Korea, Mexico, One each in Korea, Mexico,

Russia, India and Canada.Russia, India and Canada.– Seven major plant extensions Seven major plant extensions

are under construction are under construction

in the United States and one in the United States and one in the U.K., principally to meet in the U.K., principally to meet new demand in our health new demand in our health care, optical films and safety care, optical films and safety businesses.businesses.

Supply chainsSupply chains Managements philosophy is to keep capital expenditures low. Managements philosophy is to keep capital expenditures low.

Traditionally new products were launched supply chains for Traditionally new products were launched supply chains for manufacturing new products were routed through unused marginal manufacturing new products were routed through unused marginal capacity, one process in one plant, the next process in another, often capacity, one process in one plant, the next process in another, often spread across many different plants in different states, and spread across many different plants in different states, and sometimes even in different countries. It was not unusual for 3M sometimes even in different countries. It was not unusual for 3M products to touch multiple plants as they wound their way in the products to touch multiple plants as they wound their way in the transformation process from raw materials to finished goods.transformation process from raw materials to finished goods.

As customer demands increased and growth accelerated overseas, As customer demands increased and growth accelerated overseas, these long supply chains became increasingly stretched and worked these long supply chains became increasingly stretched and worked less well, and they began to consume large amounts of working less well, and they began to consume large amounts of working capital and expense.capital and expense.

Investment in core R&DInvestment in core R&D innovation, innovation,

commitment to invention commitment to invention

and the introduction of new products.and the introduction of new products.

(3M is legendary for their ability to (3M is legendary for their ability to innovate).innovate).

7 Pillars of Innovation7 Pillars of Innovation• From the CEO on down, the company is committed to innovation.From the CEO on down, the company is committed to innovation.

• The corporate culture, hire good people, let them get the job The corporate culture, hire good people, let them get the job done in their own way, tolerate mistakes.done in their own way, tolerate mistakes.

• Innovation is impossible without a broad base of technology.Innovation is impossible without a broad base of technology.

• Talk, talk, talk; encourage networking.Talk, talk, talk; encourage networking.

• Set individual expectations and reward employees for Set individual expectations and reward employees for outstanding work.outstanding work.

• Quantify efforts.Quantify efforts.

• Research must be tied to the customers.Research must be tied to the customers.

LLocalizationocalization Where logical, 3M will keep administrative and a few other Where logical, 3M will keep administrative and a few other

activities centralized. activities centralized.

But localization for 3M means increasing local customization But localization for 3M means increasing local customization manufacturing of products, particularly in international manufacturing of products, particularly in international markets.markets.

As more growth occurs overseas, 3M also will gradually As more growth occurs overseas, 3M also will gradually grow and localize our technical resources in those areas. grow and localize our technical resources in those areas.

This also will be a tremendous aid to drive growth through This also will be a tremendous aid to drive growth through better product localization.better product localization.

AcquisitionsAcquisitions For 3M, acquisitions are not simply about gaining volume. For 3M, acquisitions are not simply about gaining volume. Always get a sensible return on investment. Always get a sensible return on investment. Used to advance our technology baseUsed to advance our technology base Gain immediate new capacityGain immediate new capacity Fill our product linesFill our product lines Gain access to new marketsGain access to new markets Strengthen the coreStrengthen the core Sometimes they are about new adjacency growth areas.Sometimes they are about new adjacency growth areas.

Management QualityManagement Quality A new CEO every 5 A new CEO every 5

years. years.

This is a 104 year old This is a 104 year old company that to this company that to this day still produces day still produces innovative new cutting innovative new cutting edge products like a edge products like a start up. start up.

The manufacturing The manufacturing conglomerate an conglomerate an abrasives maker that abrasives maker that broke out by inventing broke out by inventing masking tape in 1925, masking tape in 1925, is introducing new is introducing new products a if it were a products a if it were a startup.startup.

W. James McNerney, Jr. W. James McNerney, Jr. (2001- 2004) (2001- 2004) Chairman of the Chairman of the Board and Chief Executive Board and Chief Executive Officer Officer

George W. Buckley (2005 to present)

Chairman of the Board, President and Chief Executive Officer

W. James McNerney, Jr. (2001 to 2004)Chairman of the Board and Chief Executive Officer

George W. Buckley (2005 to present)Chairman of the Board, President and Chief Executive Officer

CompetitionCompetition

Industry PerformanceIndustry Performance

02468

101214161820

MMM AVY DD JNJ

Market Cap

EPS

P/E

Market Cap 6.055 = 60.55B

PE%, EPS $

Income StatementIncome Statement

Balance SheetBalance Sheet

Balance SheetBalance Sheet

Cash Flow StatementCash Flow Statement

Current ValuationCurrent Valuation Price/Earnings = 14.2 Industry = 18.9Price/Earnings = 14.2 Industry = 18.9

Price/Book = 5.5 Industry = 3.5Price/Book = 5.5 Industry = 3.5

Price/Sales = 2.7 Industry = 1.4Price/Sales = 2.7 Industry = 1.4

Price/Cash Flow = 15.8 Industry = 12.0Price/Cash Flow = 15.8 Industry = 12.0

Dividend Yield % = 2.2 Industry = 1.9Dividend Yield % = 2.2 Industry = 1.9

Morningstar (current valuation) Valuation Ratios Morningstar (current valuation) Valuation Ratios Nov. 4, 2007Nov. 4, 2007

Analyst OpinionAnalyst Opinion

3M Returns vs. S&P 500 Returns 60 months3M Returns vs. S&P 500 Returns 60 months

Firm Specific & Systematic Firm Specific & Systematic RisksRisks

On going lawsuits in On going lawsuits in Antitrust Risks for Rebate Antitrust Risks for Rebate Cases.Cases.

3M’s Acquisitions could 3M’s Acquisitions could open it up to unknown open it up to unknown risks.risks.

Venturing into new Venturing into new countries; intellectual countries; intellectual property theft.property theft.

The constant innovation The constant innovation and the time 3M takes to and the time 3M takes to go to market. If it is too go to market. If it is too early then they could risk a early then they could risk a lawsuit.lawsuit.

The price tracks the S&P; if The price tracks the S&P; if the economy is doing well, the economy is doing well, so is 3M.so is 3M.

Not much of a threat of Not much of a threat of entry (to large). entry (to large).

Rivalry between Rivalry between competitors; this is a real competitors; this is a real risk; some of the risk; some of the competitors are bigger and competitors are bigger and stronger than 3M.stronger than 3M.

Pressure for substitute Pressure for substitute products. Not much risk products. Not much risk here.here.

Bargaining power from Bargaining power from suppliers and buyers. suppliers and buyers.

Major News Events that Affect the Major News Events that Affect the Stock in Recent PeriodsStock in Recent Periods

3M Settles Patent Suits With 2 Companies 3M Settles Patent Suits With 2 Companies (Lithium Ion Battery) Oct. 2007(Lithium Ion Battery) Oct. 2007

3M Closes one deal; announces another. 3M Closes one deal; announces another. (Standard Abrasives) Nov. 2007(Standard Abrasives) Nov. 2007

3M Joins the Clinton Climate Initiative (Window 3M Joins the Clinton Climate Initiative (Window Film) Nov 2007Film) Nov 2007

US Leading Business Mission to Vietnam Nov. US Leading Business Mission to Vietnam Nov. 20072007

Is Now the Time to Panic? Investors are turning Is Now the Time to Panic? Investors are turning to blue-chip behemoths with healthy and to blue-chip behemoths with healthy and sustainable dividends. Nov 2007sustainable dividends. Nov 2007

Accordingly, 3M’s main priorities Accordingly, 3M’s main priorities for 2007 are:for 2007 are:

Keeping the growth engine going and Keeping the growth engine going and leveraging it to the bottom lineleveraging it to the bottom line

Creating an environment where creativity Creating an environment where creativity is strongly encouragedis strongly encouraged

Improving factory costs and gross margins Improving factory costs and gross margins

Flawless execution of new plant and line Flawless execution of new plant and line startupsstartups

ReferencesReferences

Yahoo (Finance)Yahoo (Finance) Methods of Corporate Valuation (NYU)Methods of Corporate Valuation (NYU) 3M’s Seven Pillars of Innovation (Arndt 2006)3M’s Seven Pillars of Innovation (Arndt 2006) CSR Case Studies 3M (Sept 2005)CSR Case Studies 3M (Sept 2005) Antitrust Risks for Rebate and Customer Antitrust Risks for Rebate and Customer

Loyalty Programs; Le Pages Inc. V.S. 3M (May Loyalty Programs; Le Pages Inc. V.S. 3M (May 2003)2003)

3M’s Acquistion of HighJump Will Enhance Its 3M’s Acquistion of HighJump Will Enhance Its Market Position (Woods 2004)Market Position (Woods 2004)

Morningstar.comMorningstar.com

Questions?