3M Company (MMM – Free 3M Stock Report), a component of the Dow Jones Industrial Average, reported disappointing third-quarter results and issued guidance that also was not well received by the investment community. Shares of the diversified manufacturing giant are trading sharply lower this morning in a down tape for Wall Street.
Specifically, the Minnesota-based company reported adjusted share earnings of $2.58 for the September period. Although that figure was up 11% year over year, the tally fell short of our estimate and the expectation on Wall Street; both calls were around the $2.70-a-share mark. A confluence of factors was behind the third-quarter earnings miss, including a drop in total sales, a negative foreign exchange translation impact, which penalized the bottom line by $0.05 a share (the prior expectation was that foreign exchange translation would be 10 cents accretive to earnings), and worries about the effect of the ongoing international trade disputes between the United States and some of the world's largest economies, most notably China.
The most troubling aspect of the quarterly earnings release was the 0.2% decline in total sales, to $8.2 billion. Our call was for sales of more than $8.4 billion. The company's international operations were at the root of the problem. During the interim, sales fell 3.9% in Europe, the Middle East and Africa (EMEA) and 5.5% in Latin America/Canada. By division, sales were flat in the Industrial segment and advanced 7.0% in the Safety and Graphics unit. Those results were offset by respective top-line declines of 2.8%, 4.8%, and 3.4% in the Health Care, Electronics and Energy, and Consumer segments. Our sense is that the contentious trade relations between the United States and many of its global trading partners since the beginning of March are starting to be felt by this multinational company, with operations in more than 70 companies.
Moving forward, 3M Company has lowered both its top- and bottom-line expectations for this year, and we have followed suit. Specifically, the manufacturer now expects non-GAAP share earnings to be in the range of $9.90 to $10.00, versus its previous call of $10.20 to $10.45. Accordingly, we have cut our share-net call by $0.30, to $10.00, which is at the apex of the company's provided bracket. We think the ongoing trade squabbles between the United States and many of its trading partners, rising inflation, which will likely make the cost of doing business for this manufacturer more expensive, the stronger U.S. dollar, and the predicted slowing in global economic growth next year (the International Monetary Fund recently lowered its growth expectations for the global economy), will pressure a number of 3M's businesses in the coming quarters.
The recent operating sluggishness aside, the company remains very shareholder friendly. In fact, 3M Company paid $794 million in cash dividends and repurchased $1.1 billion of common stock during the third quarter. We expect this trend to continue, given the company's stellar cash flow generation and healthy balance sheet, which includes billions of dollars of cash on hand. Investors should note that our Financial Strength rating for 3M Company is A++, which is our highest mark.
From an investment perspective, as noted above, we don't see many catalysts to drive this stock higher in the near-term. The company continues to face a challenging operating landscape, particularly overseas. That said, this issue should continue to appeal to conservative accounts that stress income. The company's dividend, which has seen annual increases for many decades, even during the lean years of the last recession, offers a yield that is comfortably above the Value Line median.
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.)
- William G. Ferguson
