Diversified products manufacturer and Dow-30 member 3M Company (MMM – Free 3M Stock Report) reported what we view as disappointing second-quarter financial results this morning. Although the company said that share earnings came in at $2.58 a share, 24% better than the year-earlier mark and well ahead of our estimate, the most recent tally included a $461 million gain from the divestiture of a business, adding $0.55 to after tax share earnings. Excluding the contribution, earnings per share were actually down a nickel, year-over-year, despite substantial stock repurchases. All things being equal, share earnings declined nearly 4%. Despite all this, it should be noted that our presentation for 3M remains in GAAP terms as the company plans to continue to buy and sell businesses in order to get back to streamline operations in order to get back to its roots.
The top line increased 1.9%, largely in line with our estimate. Organic local-currency sales were up 3.5%, but divestitures took a 1.0% bite, with foreign currency translation responsible for another 0.6% of the dip. Geographically, sales were up 8.3% in Asia Pacific, 2.5% in Latin America/Canada, and 0.5% in the United States, but fell 3.6% in EMEA (Europe, Middle East, and Africa). Electronics and Energy was the biggest contributor by business segment, posting a 7.5% increase in sales, followed by Industrial (+2.5%, Health Care (1.8%), and Consumer (+0.5%). The Safety and Graphics arm, meanwhile, was the worst performer, recording a 0.9% decline in sales.
Management tweaked its guidance following the June-quarter release, saying that it now expects to earn $8.80 to $9.05 a share for the full year, up a dime at the low end. It was a similar story from a sales perspective, with the company now calling for organic local-currency sales growth of 3% to 5%, up from its previous 2% to 5% forecast. In response, we have decided to up our full-year 2017 earnings-per-share estimate by a nickel, to $8.95, but warn that soft operating results are likely to continue to be masked by share repurchases and other management-driven influences over the next few quarters, due to a less-than-ideal backdrop and a mature product portfolio. We would have expected management's earnings forecast to be increased more, given the second-quarter beat.
The investment community was apparently left wanting more, too. The stock has pulled back more than 5% this morning on news of the June-quarter financial release, and is trading below the $200-a-share mark for the first time this summer. While the near-term picture is unexciting, we think that the current price tag presents a buying opportunity for more-patient accounts. The aforementioned restructuring efforts ought to help produce better margins, while enabling management to focus on what it does best. Meanwhile, the company's financial wherewithal should continue to help in these endeavors as well as continue benefiting shareholders via ongoing share repurchases and dividend increases. Also, healthy cash flow generation and a top-notch Financial Strength rating (A++) ought to allow management to actively pursue just about any acquisition opportunity that may arise, thereby potentially breathing life into its product portfolio. Investment appeal here is further buoyed by the stock's Highest marks for Safety (1) and Price Stability (100 out of 100). We think now would be a good time for those thinking long term to build a position here.
About the Company: 3M, a component of the Dow Jones Industrial Average, is a diversified manufacturer that sells more than 50,000 products in more than 70 countries. Its five business segments include: Industrial (34% of 2016 sales); Safety & Graphics (18%); Healthcare (18%); Electronics & Energy (17%); and Consumer (15%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
