Diversified products manufacturer and Dow-30 member 3M Company (MMM – Free 3M Stock Report) released its 2019 fourth-quarter and full-year financial results this morning and investors were not impressed. Indeed, the stock is trending a few basis points lower in price since the opening bell. While results disappointed on both the top and bottom lines, Wall Street's sentiment was probably further shaken by guidance and an update regarding the company's business model and organizational transformations, as well as developments on the litigation front.
The global conglomerate continues to have some trouble from an operational standpoint. It earned $1.95 a share in the final quarter of 2019, well short of the $2.31 mark notched in the previous-year period and our estimate. Sales were in line with our assumption, but increased only 2.1%, due to a less-than-ideal global demand environment, currency headwinds, and divestitures. The latter was largely the result of the aforementioned transformation initiative. That said, margin pressures were the primary reason for the bottom-line miss, as expenses climbed across the board.
Looking at the top-line with more granularity, organic local-currency sales declined 2.6% for the quarter, bringing the full-year decrease to $1.5%, the upper end of management's guidance. The Health Care business enjoyed top-line success, thanks to acquisitions, but the Safety and Industrial and Transportation and Electronics units both reported declines. Sales in the Consumer segment were flat. Geographically, acquisitions drove the United States, Latin America/Canada, and Worldwide into positive territory, but was unable to do the same for Asia-Pacific and Europe, Middle East, and Africa.
Looking ahead, leadership is expecting earnings to come in between $9.30 a share and $9.75 a share, for all of 2020. Organic local-currency sales are forecast to be flat to +2%, pointing to some improvement on the demand side of things despite the likelihood of ongoing weakness in China. We suspect that margins will trend higher, too, as the restructuring and other cost-containment efforts bear fruit. During the fourth-quarter conference call, management said that it expects the latest part of its cost-cutting initiative to result in $40 million-$50 million in pre-tax savings this year, and $110 million-$120 million over time. Adding it all up, we remain are comfortable with our $9.60-a-share EPS and $33.5 billion sales calls and are thus keeping them intact for the time being.
In other news, the company's litigation surrounding the possible use and disposal of harmful substances in certain products remains ongoing. It recorded a $0.29-a-share charge related to litigation in the fourth-quarter and we do not suspect that such costs are likely to subside anytime soon.
This stock continues to trade well off its all-time high etched about two years ago. While all the moving parts, especially the uncertainty on the legal front, add some risk otherwise not typically inherent with this equity, we think that the company's holds worthwhile long-term total-return potential for risk-tolerant investors at this time, given the company's size, finances, and shareholder friendly ways. Also, leadership has always been quite aggressive on the M&A front, which should help the company over time regardless of the operating backdrop. That said, momentum-seeking and risk-averse parties will want to look elsewhere until the dust on the legal side of things settles.
About the Company: 3M, a component of the Dow Jones Industrial Average, is a diversified global manufacturer, technology innovator, and marketer of a wide variety of products and services. Its five business segments include: Industrial (37.2% of 2018 sales); Safety & Graphics (19.8%); Health Care (19.1%); Electronics & Energy (16.9%); and Consumer (15.2%). (Elimination of Dual Credit was an 8.2% drag.)
– Andre J. Costanza
