3M To Divest Communication Markets Business For $900 Million

3M Company (NYSE:MMM) recently inked a definitive agreement with Corning Incorporated (NYSE:GLW) to divest its Communication Markets business for $900 million. Corning is a premier manufacturer of glass, ceramics, and related materials for industrial and scientific applications. The transaction is expected to be completed in 2018, subject to mandatory closing conditions and regulatory approvals.

The held-for-sale business is part of 3M’s Electronics and Energy segment and offers a wide array of optical fiber and copper passive connectivity solutions for the telecommunications industry. These include closures, connectors, splices, modular cabinets and structured cabling systems for copper fiber optic networks and wireless media. The business employs approximately 500 employees and generates annual global sales to the tune of $400 million. Post divesture, these employees will be absorbed by Corning Incorporated. 3M expects to realize a gain of approximately 40 cents per share from the deal.

3M decided to divest the business to focus on its core businesses. Over the years, the diversified industrial goods manufacturer has continuously pruned its businesses to improve customer relevance, productivity and speed through a leaner operating structure. At the same time, 3M has maintained a steady investment in R&D to develop innovative products.

3M expects to deliver sustainable increase in earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs. The company’s ability to convert high R&D spends into up-cycle market share gains and strong pricing powers determine its success. Organic growth remains the first priority of the company as it continues to invest in infrastructure and commercialization capability. With a diligent execution of operational plans, 3M has outperformed the industry with an average year-to-date return of 34% against a decline of 4.6% for the latter.

3M's global footprint, diversified product portfolio and the ability to penetrate in different markets have been its forte. For the five-year period of 2016-2020, the company expects 8-11% growth in earnings per share driven by an organic sales growth of 2-5%. It expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%. Furthermore, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500 million to $700 million in annual operational savings by 2020, and an additional $500 million reduction in working capital.

3M presently has a Zacks Rank #2 (Buy). Some other stocks in the industry worth considering are Danaher Corporation (NYSE:DHR) , Raven Industries, Inc. (NASDAQ:RAVN) and Leucadia National Corporation (NYSE:LUK) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher has a long-term earnings growth expectation of 10.6%. It surpassed estimates in each of the trailing four quarters with an average positive surprise of 2.6%.

Raven has a long-term earnings growth expectation of 10%. It delivered an earnings beat thrice in the trailing four quarters with an average positive surprise of 25.8%.

Leucadia has an expected long-term earnings growth rate of 18%. It exceeded estimates thrice in the last four quarters with an average beat of 21.2%.

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