3M Posts Weak Results; Lowers Guidance
Shares of industrial conglomerate 3M Co. (NYSE: MMM – $166.00) are trading lower today after it reported third-quarter earnings of $2.15 per share, an increase of 4.9% versus last year on flat sales of $7.7 billion. Analysts expected $2.14 a share with no change in sales. The company’s vast footprint continued to work against it, with uneven global economic recoveries and foreign currency headwinds taking a toll on the multinational’s five operating segments. The Electronics and Energy business remained the biggest drag on results due to still-tepid energy-related and declining telecom solutions demand. On a positive note, the Consumer division was able to shrug off the headwinds thanks to momentum in home improvement and home care sales. Geographically, the Asia-Pacific region was the worst performer, with sales there shrinking 2.2% in organic local-currency terms. On a business segment basis:
- Sales of $2.6 billion, up 1.0% in U.S. dollars.
- Sales growth in automotive OEM and automotive aftermarket was offset by declines across the rest of the portfolio
- Operating income was $591 million, up 2% year-on-year; operating margin of 22.9%.
Safety and Graphics
- Sales of $1.4 billion, up 2.2% in U.S. dollars.
- Sales growth was led by roofing granules and commercial solutions. Sales increased in Latin America/Canada, Asia Pacific and the U.S., and declined in Europe, Middle East and Asia (EMEA)
- Operating income was $364 million, an increase of 12.3% year-on-year; operating margin of 25.1%.
- Sales of $1.4 billion, up 1.1% in U.S. dollars.
- Sales growth was led by food safety, drug delivery and critical and chronic care. Sales grew in Asia Pacific, Latin America/Canada and EMEA, and declined in the U.S.
- Operating income was $429 million, a decrease of 0.6% year-on-year; operating margin of 31.5%.
Electronics and Energy
- Sales of $1.3 billion, down 7.5% in U.S. dollars.
- Electronics-related sales decreased 8%, with declines in both electronics materials solutions and display materials and systems; energy-related sales declined 9%, with declines in telecom, electrical markets and renewable energy. Sales decreased in all geographic areas.
- Operating income was $312 million, down 9.1% year-on-year; operating margin of 24.2%.
- Sales of $1.2 billion, up 4.0% in U.S. dollars. Sales growth across the entire portfolio was led by home improvement and home care. Sales grew in Asia Pacific, the U.S. and Latin America/Canada, and declined in EMEA.
- Operating income was $317 million, up 8.3% year-on-year; operating margin of 26.2%.
Looking ahead, 3M trimmed its sales and earnings outlooks for 2016 and sees lackluster economic growth continuing into next year. The company said it expects sales to be flat this year, where previously it forecast sales rising 1%. The company trimmed a dime off its profit per share guidance for the year to $8.15 to $8.20, below Street estimates of $8.22. Despite the unimpressive report, there is plenty to like here for risk-averse investors as the company has strong finances and has proven earnings’ predictability. An above-average and well-covered dividend, yielding 2.6%, is a positive as is the company’s healthy cash flow generation. The latter, along with management’s experience, ought to help the company introduce another product, whether it be organically or via acquisition, that can jump-start the top line. I consider MMM a core holding for conservative investors.