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3M’s Q1 Earnings Disappointed Investors

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3M’s Q1 2019 adjusted EPS

3M (MMM) announced its first-quarter earnings on April 25. It reported adjusted EPS of $2.23, a decrease of 10.8% on a year-over-year basis. In the first quarter of 2019, 3M posted adjusted EPS of $2.50. 3M failed to beat the Wall Street estimate of adjusted EPS of $2.49.

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The decline in 3M’s (MMM) adjusted earnings per share was driven by the increase in its cost of goods sold (or COGS). 3M reported $4.3 billion in COGS in the first quarter, which represented 54.8% of the revenue and an increase of 360 basis points on a year-over-year basis. In the corresponding quarter of the previous year, COGS stood at 51.2% of the revenue, which indicates that 3M continued to experience pressure from the increase in raw material prices and at the same time failed to transfer the cost to its customers in the form of price increases. Further 3M’s effective tax rate also saw an increase from 17.6% to 19.5%.

Revenues decline by 5.0%

3M reported revenue of $7.9 billion, a decline of 5.0% on a year-over-year basis. The strong dollar had an adverse impact of 3.4%, while divestitures, net of acquisitions, reduced the sales by 0.4%, and organic sales declined by 1.1%. With the exception of the Health Care segment, all other reporting segments reported a decline in revenue.

Guidance and stock price

3M again downgraded its earnings. For 2019, 3M now expects its 2019 adjusted EPS to be in the range of $9.25 and $9.75 as against the earlier guidance of $10.45 to $10.90. This guidance cut disappointed investors, and the stock plummeted by ~12.9% on the day the company announced its earnings. Peers Stanley Black, and Decker (SWK), Caterpillar (CAT), and Honeywell (HON)  fell ~1.7%, ~1.2%, and ~0.5%, respectively.

Investors can indirectly hold 3M by investing in the SPDR Dow Jones Industrial Average ETF (DIA), which invested 4.9% of its holdings in 3M on April 26.

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