Diversified products manufacturer and Dow-30 member 3M Company (MMM – Free 3M Company Stock Report) has reported solid, albeit somewhat disappointing first-quarter financial results, and Wall Street is taking note. Indeed, the company posted adjusted earnings of $2.50 a share, 16% higher than the year-earlier mark, but a nickel shy of expectations. Although sales improved a better-than-anticipated 7.7% (discussed below), to $8.278 billion, and the Tax Cuts and Jobs Act slashed the effective tax rate, margin improvement slowed to a crawl due to investment in what seemed to be commercialization capabilities. The pressures were most notable at the Consumer segment, with operating income there declining a couple of basis points on a year-over-year basis. The investment community was not happy with the latest round of results, sending the stock sharply lower this morning.
Top-line growth remained healthy across most businesses and geographic regions. As for the former, sales increased 15.0% year over year at Safety and Graphics, 7.1% at both Industrial and Health Care, 5.0% at Consumer, and 4.6% at Electronics and Energy. Geographically, sales were up 13.7% in Europe, Middle East, and Africa; 10.0% in Asia Pacific; 4.3% in Latin America/Canada; and 3.5% in the United States.
3M Company's guidance missed the mark. Management narrowed its full-year share-earnings outlook to between $10.20 and $10.55, from its previous $10.20-$10.70 range. It did the same with its top-line forecast, now calling for organic local-currency sales growth of 3%-4%, a percentage point lower at the upper end of its previous expectation. The company's operating income projection suggests continued margin pressures, and a flattish 2018 result.
We are tempering our assumptions for this year and next. The likelihood of margin headwinds and slower-than-originally thought top-line growth has prompted us to rein in our bottom-line estimate by $0.15 a share, to $10.45, for all of 2018. For much the same reasons, we have shaved a dime from our 2019 earnings-per-share call, which now stands at $11.40.
The recent share-price weakness presents a buying opportunity for would-be investors, in our view. The stock is trading more than 20% below its high-water mark set back in January and at a more reasonable price-to-earnings multiple than in the past. While the aforementioned margin concerns loom, the company has a number of tailwinds working in its favor, including solid cash flow generation. To wit, we suspect that management will continue to put the money to work, seeking out acquisitions, retiring debt, and buying back shares. The company is also well positioned for the long haul. Meanwhile, leadership has not been shy about restructuring in the past. As such, additional streamlining efforts are likely to help remedy current issues. All things considered, 3- to 5-year price appreciation potential is worthwhile on a risk-adjusted basis. The above-average dividend yield, and likelihood of further payout hikes, also add to this Dow-30 stock's investment appeal.
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 (34.5% of 2017 sales); Safety & Graphics (19.4%); Health Care(18.4%); Electronics & Energy (16.3%); and Consumer (14.5%). (Elimination of Dual Credit was a 3.1% drag.)
— Andre J. Costanza
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
