3M in 2Q16: Improving Operations Mask Underlying Demand Weakness



3M’s 2Q16 earnings

3M (MMM) is a diversified industrial (IYJ) conglomerate that makes everything from Scotch tape to high-grade security gear. On July 26, 2016, it released its 2Q16 earnings before the Markets opened.

The earnings release resulted in a negative price action of 1.1%, and 3M stock closed at $177.66 that day. Several other industrial (RGI) conglomerates such as Stanley Black & Decker (SWK), Dover (DOV), and Honeywell International (HON) also declared their earnings last week.

In 2Q16, 3M reported diluted earnings per share of $2.08 against Wall Street estimates of $2.06. Earnings for 2Q16 reflected a growth of 3% over 2Q15’s diluted earnings per share of $2.02.

Earnings were driven by a $0.07 benefit from a 3% lower share count, a $0.03 impact of acquisitive growth, and a $0.04 advantage from operating margin expansion. On the negative side, currency translations and a higher tax rate reduced earnings by $0.04 each.

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Investors should note that earnings per share were higher despite sluggish sales in the quarter. Higher earnings reflect the company’s ability to make operational improvements within its enterprise. 3M has also used its massive cash holdings to make share repurchases. That has enabled the Minnesota-based company to boost earnings per share in relative terms.

Management commentary

Speaking on the recent quarterly performance, Inge Thulin, the company’s chair, president, and CEO (chief executive officer), said, “Building on a solid first quarter performance, our team controlled the controllable and posted another quarter of strong earnings and expanded margins.”

He went on to say, “Our execution of the 3M playbook is enabling us to deliver premium returns today while also building for the future, which includes making good progress on business transformation and investing approximately 10 percent of our sales into R&D and capital expenditures in the quarter.”


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