3M Disappoints Wall Street; Hikes Full-Year Guidance

Shares of diversified products company 3M (NYSE: MMM – $199.39) shed 5% today after reporting disappointing second-quarter results. Net earnings per share on an adjusted basis came in at $2.25 as compared to $2.08 a year ago, but twenty-nine cents below Street estimates. The top line increased 1.9%, largely in line with estimates and organic local-currency sales were up 3.5%, but divestitures took a 1.0% bite, with foreign currency translation responsible for another 0.6% of the dip. Geographically, sales were up 8.3% in Asia-Pacific, 2.5% in Latin America/Canada, and 0.5% in the United States, but fell 3.6% in EMEA (Europe, Middle East and Africa). Electronics and Energy was the biggest contributor by business segment, posting a 7.5% increase in sales, followed by Industrial (+2.5%), Health Care (+1.8%) and Consumer (+0.5%). The Safety and Graphics arm, meanwhile, was the worst performer, recording a 0.9% revenue decline. Management did however tweak its guidance, saying it now expects to earn $8.80 to $9.05 a share for the full year, up a dime from $8.70 to $9.05. Consensus estimates for MMM are at $8.96 per share. Similarly, from a sales perspective, 3M is now calling for organic local-currency sales growth of 3% to 5%, up from its previous 2% to 5% forecast.

       The investment community was apparently left wanting more with the shares trading below $200 for the first time since early June, and a bit of an overreaction in my opinion. While the near-term picture is unexciting, restructuring efforts ought to help produce better margins, while enabling management to focus on what it does best. Meanwhile, the company’s financial wherewithal should continue to help, thus benefiting shareholders with ongoing share repurchases and dividend increases. Also, healthy cash flow generation and a top-notch balance sheet ought to allow management to actively pursue just about any acquisition opportunity that may arise, thereby potentially breathing life into its product portfolio. The shares also yield 2.24% at current levels and despite today’s retreat, are up over 16% the past year.

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