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Is There Room for 3M’s Margins to Improve Any More?

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3M operating margins in 2Q16

3M’s (MMM) operating margins expanded 50 basis points to 24.4% in 2Q16. As has been the case for several industrial (IYJ) companies such as Stanley Black & Decker (SWK) and Caterpillar (CAT), 3M has benefited from lower year-over-year commodity prices.

In terms of operating margin contribution, a 90-basis-point benefit from lower raw material prices and a 40-basis-point advantage from higher pricing offset the 110-basis-point decline in organic volumes. Improved productivity from restructuring charges incurred last year also resulted in a 40-basis-point expansion in operating margins in 2Q16.

Among the business segments’ operating margins (or OM), the healthcare segment was up again by 40 basis points to 32.7%. OM in the safety and graphics (27.4%) and consumer (24.9%) segments witnessed the largest expansions of 200 basis points and 160 basis points, respectively.

Operating margins in the Electronics (VGT) and Energy segment fell 200 basis points to 19.3%. The company likely sacrificed margins to gain business in a weak demand environment.

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3M’s margins to improve in relative terms

3M’s management stated that it expects operating margins to expand anywhere between 100 basis points and 150 basis points for the whole year. The first and fourth quarters are expected to represent a large portion of that margin expansion.

However, in 4Q15 (OM of 20.5%), the company undertook one-time restructuring charges, which eroded its operating margins by 160 basis points. So most of its margin expansion in 4Q16 will likely be due to an easier comparison with 4Q15.

The company is likely to witness pressure on raw material costs, as commodity prices have gained since the beginning of the year. So unless prices increase more than the cost of raw materials, gross profits could edge lower and weigh on operating margins.

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