Shares of 3M (MMM – Free 3M Stock Report) were little changed after the diversified products manufacturer and Dow-30 component released its second-quarter results. Specifically, the company reported sales of $8.390 billion, up 7% on a year-over-year basis, but short of the consensus estimate. (We were looking for sales of $8.410 billion.) Top-line growth was solid across the board, led by a 15.8% advance at the Safety and Graphics segment, but the divestiture of the communication markets business as a whole was a drag. For good measure, sales increased 6.8% in Industrial; 4.9% in Health Care; 4.6% in Consumer; and 3.6% in Electronics and Energy. Geographically, sales improved 9.5% in EMEA; 7.9% in Asia Pacific; 7.1% in the United States; and 3.1% in Latin America/Canada.
The bottom line disappointed, too. GAAP earnings came in at a better-than-expected $3.07 a share, but included a $0.48-a-share gain related to the aforementioned divestiture. Sans the one-time gain that we are thus treating as a nonrecurring item, share earnings tallied $2.59, nearly a nickel below our estimate and just a penny ahead of the year-earlier figure, despite a far lower share count and more-favorable tax rate. Margin compression was largely responsible for the bottom-line decline, as growth initiatives likely continued to take a toll.
Guidance probably did little to help investor sentiment. Management trimmed its full-year 2018 adjusted share-earnings outlook to $10.20 to $10.45, down a dime at the upper end. This is the second downward revision this year as the company was originally forecasting the upper end to come in at $10.70.
We are shaving a nickel from our 2018 share-earnings call. While we think that top-line growth should remain healthy, and that the lower tax rate and ongoing share repurchases will remain boons, margin pressures, coupled with the loss of communication markets-related business, are responsible for our decision. We are leaving intact our 2019 share-net estimate at $11.40 for the time being.
We continue to like the stock's long-term story and think that buy-and-hold accounts would do well to take advantage of any price weakness. While margins are likely to remain under pressure near term, management's efforts should pay off in the end. Meantime, the company's position atop the market (with its large size and scale), and healthy cash flow generation ought to help ease any additional growing pains. Management is likely to remain active in repositioning the portfolio, but its track record has us optimistic that it will be successful in any such future endeavors. The stock is even more attractive on a risk-adjusted basis, and the dividend yield sweetens the pot.
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
