Shares of 3M Company (MMM – Free 3M Stock Report) tumbled after the diversified manufacturer announced disappointing first-quarter financial results and slashed guidance. The stock had been on a relatively upward course since the turn of the calendar, but is up just roughly 4% in value for the year now, well below the S&P 500 Index.
The company earned $2.23 a share for the March quarter, 11% off the year-earlier tally and well below our $2.55 estimate. A top-line miss was a big reason for the shortfall, as sales came in at $7.863 billion, 5.3% below the previous year total and equally shy of expectations. Management placed a fair share of the blame on slowing end market demand, as organic sales declined 1.1% for the period. That said, divestitures and foreign currency translation played a role, too.
Segment wise, only Health Care was able to eke out a gain to the tune of 0.3%. Energy and Electronics, Industrial, Safety and Graphics, and Consumer reported pull backs of 11.8%, 6.6%, 4.2%, and 1.9%, respectively.
Geographically, Europe, Middle East, and Africa (collectively referred to as EMEA) was the biggest trouble spot, posting a 9.4% sales decline. Asia Pacific and Latin America/Canada did not fare much better, however, falling 7.4% and 6.5%, respectively. Sales inched 0.1% higher in the United States.
While stock repurchases continued to aid share-net comparisons, ongoing margin pressures and a higher tax rate posed further headwinds. The operating margin retreated 160 basis points on a year-over-year basis, and the effective tax rate was almost 200 basis points higher.
Guidance probably played a major role in the stock's pullback, also. Management now expects to earn between $9.25 and $9.75 a share for all of 2019, down from its previous $10.45-$10.90 range. In doing so, leadership now looks for organic local-currency sales of minus 1% to plus 2%, versus its earlier call for a 1% to 4% gain.
We've tempered our expectations accordingly. Our new share-earnings estimate for all of 2019 sits at $9.60, down $1.00 from our previous call. While top-line pressures are largely responsible for our reduction, we also are now modeling for continued margin pressures and a slightly higher effective tax rate.
We think that the aforementioned pullback provides risk-averse parties with a long-term investment horizon a decent entry point. This blue chip holds below average three- to five-year growth potential, but total-return potential is more appealing on a risk-adjusted basis. Plus, the company's cash flow, along with management's willingness to alter the business model via the M&A game, make it possible that our 2022-2024 projections will be proven conservative. Regardless, this Dow member should deliver relatively steady gains.
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 a 8.2% drag.)
- Andre J. Costanza
