Analyzing Industrial Giant 3M before Its Q1 Earnings


Apr. 27 2020, Published 10:56 a.m. ET

Lately, 3M (NYSE:MMM) has been in the news due to increased demand for its N95 masks amid the COVID-19 outbreak. The Pentagon awarded 3M, Honeywell International (NYSE:HON), and a unit of Owens & Minor with contracts to produce 39 million N95 masks. The masks are being produced for medical workers under the Defense Production Act. 3M will receive $76 million for producing these masks.

The company is also working with Ford (NYSE:F) to accelerate the production of its powered air-purifying respirators to meet the spike in demand for personal protection equipment. 3M has teamed up with Cummins to increase the production of the filters used in its powered air-purifying respirators.

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3M will likely announce its first-quarter results on Tuesday. In the past few years, the company’s performance has been weak. Investors will watch for any improvement in the company’s operational metrics due to its transformational plans. The company announced that it cut 1,500 positions as part of its restructuring plans.

Expectations from 3M’s Q1 results

3M’s revenue fell by 1.9% to $32.1 billion in 2019. The top line gained from a rise of 8.9% and 0.1%, respectively, in the company’s Health Care and Consumer businesses. However, the sales from the Safety and Industrial and the Transportation and Electronics businesses fell by 7.1% and 5.0%, respectively, last year. The company’s overall organic sales declined by 1.5%. 3M makes a wide range of products including Post-it Notes, Scotch Tape, and inhalers.

The surge in the Health Care segment’s 2019 reported sales reflected the acquisitions of M*Modal as well as Acelity and its KCI subsidiaries.

In January, 3M said that it expects to return to growth in terms of its organic sales and earnings this year. The company predicted 2020 organic sales growth of 0%–2%. Meanwhile, the 2020 EPS guidance range is $9.30–$9.75. The company’s 2019 adjusted EPS declined by 13% to $9.10.

During the J.P. Morgan Conference call held on March 10, 3M estimated that its first-quarter organic sales growth would be flat to down slightly YoY (year-over-year). The company also estimated COVID-19 related demand to benefit its first-quarter organic sales growth by 1 percentage point.

Meanwhile, analysts expect 3M’s first-quarter sales to grow by 0.6% YoY to $7.91 billion. They also expect about a 9.0% YoY decline in the first-quarter adjusted EPS to $2.03.

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Will 3M stock recover in 2020?

3M stock has declined 16.7% year-to-date, while Honeywell International stock has fallen 23.4%. The S&P 500 and the Dow Jones have fallen by 12.2% and 16.7%, respectively, this year. Currently, only three out of 18 analysts have a “buy” recommendation for the stock. Notably, 11 analysts have a “hold” rating, while four have a “sell” rating.

Certain investors prefer 3M due to its attractive dividends. The company is a “dividend king”—a term used for companies that increased their dividends for at least 50 consecutive years. In February, 3M raised its dividend by 2%, which marked the 62nd consecutive year of a dividend hike. As of April 24, 3M’s dividend yield was 4%.

Currently, 3M has experienced coronavirus-led demand for N95 masks and certain other products. However, there isn’t much clarity on the exact proportion of revenues that these products generate for the company. In a press release on April 14, 3M said that it has increased the production of N95 and other respirators. The company has doubled its worldwide output to 1.1 billion per year. 3M will invest more to increase its capacity to 2 billion within 12 months.

The average 12-month target price of $146.67 as of April 24 is almost on par with the company’s closing stock price of $147 on April 24. The COVID-19 pandemic has boosted the demand for some of 3M’s products. However, the economic slowdown has hurt the company’s other businesses. Analysts will likely revise the company’s target price based on its overall outlook for 2020.


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