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3M Could Beat Analysts’ Earnings Estimates in 1Q18

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3M’s adjusted EPS estimation for 1Q18

3M (MMM) is expected to post an adjusted EPS (earnings per share) of $2.51 in 1Q18—an increase of 16.2% compared to 1Q17. In 1Q17, 3M reported an adjusted EPS of $2.16. If 3M can beat Wall Street analysts’ expectations, it would continue its trend of beating the estimates in every quarter last year.

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Driving factors

3M’s projected adjusted EPS growth is expected to be driven by the continued integration of its business portfolio through divestitures and acquisitions, which will help bring down its operating expenses as a percentage of sales. Analysts expect 3M’s COGS (cost of goods sold) in 1Q18 to be ~$4.1 billion, which represents 50.3% of its expected 1Q18 sales. In 1Q17, 3M reported COGS of ~$3.9 billion, which represents 50.3% of its sales and indicates that the COGS will likely remain flat. However, the biggest gain could come through the SG&A (selling, general, and administrative) expenses (SG&A), which are estimated at ~1.6 billion and represent 18.8% of the expected sales. In 1Q17, the SG&A expenses were 20.4% of the revenue, which implies a gain of 160 basis points on a year-over-year basis.

The other influencing factors would be the increased revenue, favorable foreign currency, and lower tax rates due to new tax laws.

Share repurchases

In 4Q17, 3M bought back 2.18 million shares. At the end of 4Q17, 3M had 613.4 million common shares outstanding. At the end of 1Q18, analysts predict that 3M’s outstanding shares will be at 610.4 million. In 1Q17, 3M’s outstanding shares stood at 612 million. With the number of outstanding shares expected to decrease, 3M’s adjusted EPS could get a boost.

Investors could hold 3M indirectly by investing in the Industrial Select Sector SPDR ETF (XLI), which invests 5.7% of its portfolio in 3M. XLI also holds Boeing (BA), Honeywell (HON), and Caterpillar (CAT) with weights of 8.1%, 4.8%, and 4.0%, respectively, on April 17, 2018.

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