Diversified products maker and Dow-30 member 3M Company (MMM – Free 3M Stock Report) has announced better-than-expected results for the final quarter of 2017. Although the company reported GAAP earnings of $0.85 a share, this included a $762 million charge related to the recently enacted Tax Cuts and Jobs Act that shaved $1.25 from the earnings-per-share total. Thus, adjusted share earnings, which we are using, came in at $2.10, 11.7% over the year-earlier tally and $0.07 ahead of our call, despite fewer share repurchases than we were anticipating.
The bottom-line outperformance was largely fueled by a top-line beat. Indeed, sales impressed, tallying $7.990 billion, 9.0% above the previous-year mark. The December-quarter result was also well ahead of our estimate, thanks to 6.0% organic local-currency growth and gains in each business segment and geographic region. Europe, Middle East & Africa led the charge, posting a 17.1% advance (on a reported basis), followed by Asia Pacific and Latin America/Canada, which inked respective increases of 14.4% and 4%. Of note, sales in the U.S. climbed 3.0%, which came as a bit of a surprise as domestic growth had been hard to come by in recent years. Segment wise, Safety & Graphics remained the leader in terms of growth, despite divestitures, with Electronics & Energy close behind.
That said, margin improvement seemed to slow in the fourth quarter. Even though the depreciation figure (used in calculating the EBITDA margin) was not provided in today's release, it appears as though contributions from cost-containment efforts were not as significant as we had become accustomed to seeing. We are not concerned, however, and think that management will continue to streamline the business model, thus unveiling additional savings going forward.
The global conglomerate raised its earnings guidance for 2018. Management said that it now expects to earn $10.20-$10.70 a share this year, up from its previous $9.60-$10.00 call. It maintained its 3%-5% organic local-currency sales growth estimate, but lowered its anticipated tax rate to a range of 20%-22%, down from its earlier 26%-27% forecast.
We think management is being a bit conservative with its outlook. The December-quarter domestic sales improvement gives us confidence that 3M will be able to at least come in at the high end of its top-line assumption. Coupled with the benefits of the lower tax rate, modest margin improvement, and share repurchases, we look for the company to report share earnings of $10.75 for all of 2018, $0.90 above our earlier assertion.
Investors like what they are seeing here. The stock is trading higher again today on the aforementioned release, and is now up roughly 40% in value over the trailing 12 months. Even though we have bumped up our 2020-2022 Target Price Range to account for numerous tailwinds, growth potential three to five years out has been limited by the equity's recent momentum. That said, MMM's total return prospects are better on a risk-adjusted basis. Indeed, it is ranked 1 (Highest) for Safety and scores favorable marks for most other Stability indicators. The company's strong cash flow generation and solid finances should only help to add to investor returns.
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% of 2017 sales); Safety & Graphics (19%); Health Care (18%); Electronics & Energy (16%); and Consumer (14%).
— Andre J. Costanza
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
