29 Jul

3M Beats Estimates, Stock Falls: Here’s Why

WRITTEN BY Sushree Mohanty

3M (MMM) stock soared 4.0% on Thursday in pre-market trading after the diversified industrial company exceeded Wall Street’s second-quarter earnings and revenue estimates. However, the stock closed 0.71% lower on Thursday. The Dow Jones Industrial Average closed 0.47% lower.

3M Beats Estimates, Stock Falls: Here’s Why

3M’s second-quarter results

In the second quarter, 3M’s revenue fell 2.6% to $8.2 billion YoY (year-over-year), missing analysts’ estimate of $8.05 billion. Although its EPS also fell 15.0% YoY to $2.20, they beat analysts’ estimate of $2.05. Its operating margin narrowed YoY to 20.8% from 28.6%. Management said the cost absorption penalties from lower production volumes affected the company’s inorganic volume growth. Acquisitions and divestitures also affected the company’s margins. The company paid $830 million in cash dividends to shareholders in the second quarter and repurchased $400 million in stock.

3M Beats Estimates, Stock Falls: Here’s Why

Why did the stock drop on Friday?

3M stock soared when the coppany surpassed analysts’ earnings estimates after posting dismal results in its first quarter. However, the company’s lower YoY revenue and earnings growth and weak forecast for 2019 took a toll on it stock on Friday, with the stock closing with a loss of 2.3%. The Dow Jones Industrial Average closed 0.47% lower on Thursday.

Segments’ performance

The company recently realigned its segments, and this quarter was its first reporting for four segments instead of five. Health Care sales rose 5.8%, Consumer sales fell 0.5%, Transportation and Electronics sales fell 2.9%, and Safety and Industrial sales fell 9.0%.

  • In Transportation and Electronics, sales rose for advanced materials and transportation safety. They declined for electronics, commercial solutions, automotive, and aerospace.
  • Health Care sales increased for health information systems, food safety, medical solutions, and oral care. They declined for drug delivery.
  • Consumer sales declined for home care and increased for consumer healthcare, stationery, and office supplies.
  • In Safety and Industrial, sales declined for industrial adhesives and tapes, closure and masking, automotive aftermarket, electrical markets, and abrasives. Sales increased for roofing granules and personal safety.

3M’s regional performance

The company’s US sales fell 1.7%, and its Latin American and Canadian sales fell 2.9%. They fell 3.5% in the Asia-Pacific region and 9.4% in Europe, the Middle East, and Africa. US-China trade tensions affected the business for many US companies in the second quarter, especially 3M’s Asia-Pacific business. In its earnings call, the company stated that end-market softness in China affected growth in almost all segments.

3M reduces forecast for this year

3M lowered its 2019 GAAP EPS forecast to reflect the deconsolidation of its Venezuelan subsidiary, to $8.25–$8.75 from $8.53–$9.03. The company, however, maintained its adjusted EPS guidance at $9.25–$9.75. It also expects organic growth in China to be lower, in the low-to-mid-single digit range.

The company recently announced its acquisition of Acelity, an addition to its Health Care portfolio. The company plans to expand its medical dressing products through this acquisition, which is set to close in the fourth quarter.

Price coverage for 3M

After 3M post its results, Credit Suisse raised its target price for its stock to $194 from $180, and UBS raised it to $188 from $182. Of the 19 analysts covering 3M, 13 recommend “hold,” one recommends “buy,” one recommends “strong buy,” two recommend “sell,” and two recommend “strong sell.” Their average 12-month average target price of $179.81 implies a 3% upside from its current price. The stock has fallen 8.6% YTD (year-to-date).

CEO’s view of earnings results

3m chairman and CEO Mike Roman said in the company’s earnings press release, “Our execution was strong in the face of continued slow growth conditions in key end markets, as we effectively managed costs and improved cash flow. Moving ahead we remain focused on continuing to drive operational improvements, investing for the future and delivering for our customers and shareholders.”

Peers’ earnings

  • Caterpillar (CAT) also reported its Q2 earnings last week, disappointing investors because of slowing demand from China. The stock closed 1.3% lower on Friday and is up 4.6% YTD.
  • Boeing (BA) also reported disappointing second-quarter results last week, missing analysts’ earnings and revenue estimates. The stock closed 0.8% lower on Friday and is up 6.9% YTD.
  • United Technologies (UTX ) reported its results last week, surpassing analysts’ expectations. The stock closed 0.53% lower on Friday and is up 27.3% YTD.
  • Honeywell (HON) released its results on July 18. Its earnings beat analysts’ estimate but its sales missed their forecast. The stock closed 0.09% lower on Friday and is up 4% YTD.

Market performance

While expectations were that this quarter earnings season could be disappointing, results look a little different. Many companies’ results have been better than expected. With the earnings season in full swing now, markets seem to be stable. The SPDR Dow Jones Industrial Average ETF (DIA) closed 0.17% higher on Friday, and has returned 16.5% YTD. The Invesco QQQ Trust ETF (QQQ), which tracks the Nasdaq Composite, has gained 20.7% YTD. The ETF closed with a gain of 0.74% on Friday. The SPDR S&P 500 ETF (SPY) closed with a gain of 0.67% on Friday, and has returned 20.8% YTD.

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