Update: Back Short on Disappointing 3M

 | Oct 25, 2011 | 11:02 AM EDT  | Comments
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This morning 3M (MMM) reported disappointing results and the stock got slammed. Earlier I was positive on the shares since I thought how bad could the slowdown get. Apparently it could get worse. The company missed estimates and cut its full year guidance.

Specifically, the company posted earnings per share of $1.55 on $7.53 billion in revenue, instead of the $1.61 and $7.78 billion in revenue. The company sees more weakness ahead as it cut full-year earnings to a range of $5.85 to $5.95 per share, down from $6.10 to $6.25.

Revenue rose 10%, but mostly came from acquisitions and one-time gains in foreign currency. Core sales are expected to grow by 3 to 4 percent, down from a previous forecast of 6 to 7.5 percent growth.

I guess the most surprising aspect of the quarter was the steep drop off in the display and graphics business. Sales in that group fell 14 percent because of weakness in the LCD TV business.

Because of these results, I think investors need to pause and reassess the global economy and where we are headed. I've always watched 3M, since I believe a lot of what they make is quickly consumed, that is, adhesives and coatings are needed immediately in the manufacturing process. Medical supplies are consumed and don't sit on the shelf too long. 3M does not make a lot of products that have long lead times. Other companies that are reporting strong results have long lead times and their products take a while to order and make. Those companies feel the slowdown afterwards. 

I guess at this point I'm confused. Are we in a global slowdown or a muddle though economy? I guess I should go back to being a short, because every time I try to turn positive, I get nailed.


Posted at 6:52 am

All eyes will be on 3M (MMM) when it reports third-quarter 2011 results Tuesday. The giant conglomerate is carefully watched by experienced investors because of its exposure to so many different parts of the economy. 3M operates in six reportable business lines -- industrial & transportation, health care, display graphics, consumer and office, communications and safety/security.

Within each segment, the company has exposure to a mind-boggling array of industries, including appliances, electronics, paper, food and beverage, automotive, aerospace, marine, pharmaceutical and, of course, adhesives. About two-thirds of the company's sales are generated overseas. The company pours 6% of revenue into research and development, and it's one of America's true R&D powerhouses.

The current consensus estimate is for earnings of $1.61 per share on revenue of $7.776 billion. Gross margin is estimated at 47.9%, and operating profit is expected to be $1.729 billion. For the year, the Street is looking for revenue of $30 billion and EPS of $6.16.

Last quarter, the earthquake in Japan impacted the company's results. Sales growth in Japan was cut 2.4%. Sales increased in all other regions, with 24.1% growth in Europe, 20% in Latin America, 11% in Asia and 8.7% in the U.S. Second-quarter sales increased by 14.1% year over year to $7.7 billion.

Investors who have been nervous about the global economy, and Europe in particular, have been dumping the stock since July. But is that the right thing to do? In the last 10 years, 3M has only had one year in which revenue was down, and that was 2009. For all of 2011, revenue is expected to be up 12%, and next year the top line is estimated to grow 5.7% to $31.8 billion while EPS totals $6.65.

Unless the global economy falls off a cliff, I really can't see this stock going much lower. I believe a lot of investors agree with me, too. When the stock hit $68, investors stepped up and bought. I believe the stock should rise another 10% or so as it works its way back into the $90s, which is where it was before nasty rumors of global devastation took hold and pounded the shares.

While Europe is a concern, and while it will take some time for Japan to come back, these problems are well known. They are built into the estimates. In the second quarter, the slowest-growing region was the U.S. If domestic growth modestly picks up next year, won't estimates begin to rise dramatically for 3M? The U.S. generates 35% of the company's sales, and another one-third comes from some of the fastest-growing economies.

Earnings per share have grown at a consolidated annualized growth rate of 10% for the last decade. By 2015, 3M expects to get 40% to 45% of its revenue from the fastest-growing geographies. The company has bought back $16 billion worth of stock and has paid dividends for 94 years straight. What could go wrong at this point? The company was called Minnesota Mining and Manufacturing in the past -- and, at this juncture, investors who buy the shares at could mine some easy profits.

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