How 3M Makes its Money (MMM)

36 yards of Scotch Tape costs a mere $4.79. While most of us have a roll or two on hand, it’s hardly a daily staple. Yet the company that Scotch Tape is the signature product of, 3M Co. (MMM), has a market cap of $110.5 billion, as of October 23, 2018. Are adhesives really that big of a business?

When coupled with dozens of other enterprises under one roof, the answer is yes. The Minnesota Mining and Manufacturing Company got its start in the early 20^th century by extracting corundum, a mineral that readers of childhood science textbooks may remember as one level below diamond on the Mohs hardness scale. These days, 3M has expanded beyond corundum to the point that it sells a more diverse line of products than just about any industrial conglomerate on the market. For Q3 2018, 3M reported $8.2 billion in sales, pretty much flat year over year. 

Beyond Scotch Tape (and the more contemporary, but equally revolutionary Post-It Note), 3M produces an almost incomprehensible 55,000 items. The company organizes those manifold operations into five segments: Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer.

Unsurprisingly, 3M’s consumer operations include office supplies. That’s in addition to other products that you may not associate with the 3M brand but likely encounter in everyday use, such as air conditioner filters, bandages, sponges, shower pads, and many of the insulation products that line snow boots and winter coats. Less prominent but equally important, 3M produces household swabs that determine lead levels and stainless steel skirtings, which make the perfect holiday gift for the tough-to-buy baseboard installer on your Christmas list.

Despite its stature, consumer operations is the smallest of 3M’s segments. The consumer business represents 14.5% of 3M’s entirety, with profit margins of 22.9% for fiscal year 2017.

Under safety and graphics operations, you won't find products, but you will find enhancements that make those products functional, like the reflective sheeting on highway signs or the roofing granules that keep the interior of your house insulated. While the reason for pairing "safety" and "graphics" into a single 3M business segment has been lost over time, the value of this product line hasn't. All told, safety and graphics represents about 19% of 3M’s total business, with 26.3% operating margins for the fiscal year 2017.

3M’s true genius is in adding value to already marketable products made elsewhere. Instead of making computer screens, 3M's electronics and energy sector makes the glare filters that cover them. Unless you’re an unusually passionate follower of inkjet printing, you probably don’t give the flexible circuits inside the cartridges a second thought — but that's exactly the kind of hidden function 3M specializes in.

From power cables to pressure-sensitive resins, most of 3M’s electronics and energy products are far removed from everyday consumer use. Even so, the electronics and energy sector accounts for one-sixth of 3M’s total revenue, at margins of 25.2%. 3M is the leading company in the U.S. for pressure-sensitive tape as of October 2018, producing products for over 25% of the American market.

Unlike electronics and energy, 3M’s health care business includes recognizable, if not memorable, items, such as surgical drapes and teeth whiteners. But even in a realm as specialized as health care, 3M still runs the gamut. Health care products include everything from coding software and metered-dose inhalers to stethoscopes and personal-use items. That last category includes “invisible” tooth braces, skin cleansers, and antiseptic foam. Healthcare comprises about 18% of 3M’s total sales, with a 31.5% profit margin in 2017, the highest of any segment.

Dwarfing all the other segments is 3M’s industrial operations. Industrial sales totaled nearly $11 billion in 2017, yet again at a 19.4% margin. It’s all but impossible to come up with a representative list of 3M’s industrial offerings, in part because there are so many of them. Membrane switch spacers? Foam fabricators? Yes and yes. The former is a layer that goes between other layers in, say, the keypads of the cardio machines at your gym. The latter is used to make gaskets and soundproofing insulation. These are the modern conveniences that most of us first take for granted and then, if we’re feeling thoughtful, marvel at. Go one step further and ask “Who actually makes this stuff?" and more often than not, 3M will be your answer. 

Like many of the largest legacy companies today, 3M’s growth does appear to be decelerating. Sales have increased by relatively minuscule amounts over the last few years, from $30.1 million in 2016 to $31.6 million in 2017. Net income attributable to 3M seems to have approached its limit, as well, falling from $5 billion to $4.8 billion in 2017. 

As a true international player, 3M’s reach encompasses every continent. Sales are concentrated mostly at home, with 40.5% of worldwide sales occurring domestically. The remainder of the Americas contribute 9.6% to total sales and Asia/Pacific comes in at 29.4% in 2017. 

3M has been part of the Dow Jones Industrial Average since 1976, which is longer than all but five of the index’s other 29 components. That fact alone indicates 3M’s formidable ability to adapt to change in an endless milieu of creative destruction. The company specializes in businesses in which few aspiring entrants have either the patience or the capital to build market share. 3M’s profit centers are myriad. Putting it all together, it’s a safe bet that 3M will still be flourishing once many of the latter-day Dow components have come and gone.