Shares of 3M (MMM - Free 3M Stock Report) were up modestly after the diversified manufacturer reported second-quarter financials. Although the company posted year-over-year declines at the top and bottom lines, both exceeded expectations. Adjusted earnings (excluding consolidation-related expenses at its Venezuela subsidiary) came in at $2.20 a share, down 12% from the year-earlier mark, but a dime ahead of our call and $0.15 above the Wall Street consensus estimate. It was a similar story at the top line, as sales declined 2.6%, far better than the 4%-plus decrease that we and the investment community were modeling for. Organic local-currency sales dipped 0.9%, with currency translation a big drag.
Geographically, the domestic operation was the best performer, posting a 1.7% total sales advance. However, the rest of the world did not fare as well, with EMEA (Europe, Middle East and Africa) inking a 9.4% decline, followed by a 3.5% fall off in Asia Pacific and a 2.9% decrease at Latin America/Canada.
Segment wise, Safety and Industrial remained the main detractor, suffering a 9.0% sales drop. The Transportation and Electronics and Consumer businesses, meantime, reported lower sales of 2.9% and 0.5%, respectively. Health Care, on the other hand, was the standout, enjoying a 5.8% uptick.
As expected, margins continued to trend lower in the June quarter. Inflationary pressure remained a problem, due to the ongoing trade war between the United States and China. While recent developments surrounding the disagreement were favorable, there is no certainty that the two super powers will be able to come to a resolution, leaving many to fear additional tariffs could be on the horizon.
For now, management left guidance intact. It continues to look for earnings of $9.25-$9.75 a share, the midpoint of which implies a roughly 5% year-over-year decline. Organic local-currency sales are forecast to be minus 1% to up 2%.
We have fine-tuned our 2019 presentation. While guidance did little to inspire us, the first-quarter beat prompted us to up our full-year share-earnings estimate by a nickel, to $9.50, the middle of the company's forecast. Our top-line call now stands at $32.5 billion, suggesting a 0.8% decline.
This multi-national appears to be well positioned for the long haul. Although the global economic environment remains a near-term headwind, the company's size and finances should help it to navigate the difficult waters. In that vein, we think it is likely that 3M will get back on track next year and post solid annual bottom-line gains thereafter out to early next decade. For good measure, we continue to pencil in earnings of $10.35 a share for 2020, representing a 9% advance, on a 3% sales increase. Earnings should reach the $13.50-a-share mark by 2022-2024.
The recent price momentum has taken a bite out of the stock's three- to five-year appreciation potential. However, the picture is brighter on a risk-adjusted, total-return basis, given MMM's favorable risk profile and above-average dividend yield. Also, the company's healthy finances and history of activity on the M&A front very may well help to prove our projections conservative. Meantime, the stock is likely to be influenced by tariff-related developments.
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 an 8.2% drag.)
– Andre J. Costanza
