Busy times. They changed the name way back in 2002, because we all referred to the company as 3M on trading floors up and down Wall Street anyway, but I still have to stop myself from referring to the company by the name it used for the 100 year prior to 2002. When I see the stock symbol (MMM) , my mind still says "Minnesota Mining and Manufacturing", that's just the way it is.
This past Friday, the SEC announced that 3M had agreed to pay more than $6.5M (with an M) to settle charges that it had violated the Foreign Corrupt Practices Act. The SEC had accused employees of the firm's Chinese subsidiary that they had arranged for officials employed by Chinese state-owned companies to attend conferences and to travel abroad, introducing them to 3M products. This was the lesser story. The non-event, if you will.
Bloomberg News reported on Sunday, stating that the 3M Company had agreed to pay more than $5.5B (with a B) to resolve more than 300K lawsuits claiming the firm had sold defective combat earplugs to the military. The stock was trading higher on this news, as many experts had seen any potential deal, after talks collapsed concerning 3M seeking some kind of bankruptcy protection from this case, in the $8B to $10B range. Under the terms of this settlement, 3M will have five years to pay out these funds.
Supposedly, these earplugs were defective for 12 years starting in 2002. I must have used these earplugs and a number of other types of earplugs during my later service. I don't know who made the earplugs in the 1980's but they weren't any better. Not knocking anyone who gets the help they need due to this settlement, not in the least. That said, I don't know any veterans, at least those who have served in combat arms or in aviation who have not suffered diagnosed hearing loss.
The stuff we do goes "boom". Mortars don't go "thump" like in the movies. They are loud, and... hand grenades. Tell me who wasn't shocked by how loud and powerful a hand grenade was the first time they were near one. Do we even discuss heavy machine guns down to simple small arms fire? These things are loud. It is a hazard of the job. Oh, and who amongst us, hasn't taken their ear plugs out (even though it hurts) so that they would not miss a command?
Getting to Be the 3M Norm
These guys are having to settle a lot of claims of late. Remember the forever-chemicals litigation? 3M agreed to pay as much as $12.5B (over 13 years) to clean up drinking water across the US that had been tainted with particles. That deal did not clear the firm from the thousands of other lawsuits brought by those impacted individuals. Yikes.
The Fact Is...
That with all of these legal issues circulating and still not completely resolved, 3M has been getting its tail kicked. In late July, the firm reported its second quarter financial results that beat expectations decisively on an adjusted basis. The firm even raised full-year guidance.
Really, though, as the firm was reporting an adjusted EPS for that quarter of $2.17, the GAAP EPS print hit the tape at a loss of $12.35, falling more than $14 short of expectations. Sure the firm drove revenue of $8.325B and turned a gross profit of $3.766B.
Taking this one step further, operating income for the second quarter landed at $1.71B. The firm made an adjustment of $14.43 per share for "significant litigation" costs. That $14.43 came to an actual expense of $10.357B. That brought actual or GAAP operating income to $-8.958B and actual or net EBIT to -$9.023B.
These new items will have to be refigured in order for Wall Street to develop their estimates for cash flows and earnings. Then investors must keep in mind that the "forever chemicals" issue is not over and done with.
3M still has not missed a dividend payment. Still yields almost 2%. I don't know how they hold that line. A reduction there would not surprise.
This morning's pop in the share price amounts to the stock's second attempt to break out of a two and a half year downward sloping Pitchfork model in a short period of time.
Let's zoom in:
The stock has put together a six-month basing period of consolidation that the more I look at it, starts to look like an inverse head and shoulders pattern. This is bullish. I would hold my fire though. This is a company still mired with issues. Taking the 200-day SMA (simple moving average) should be an upside catalyst.
Look what happened in July though, when they increased revenue guidance. The stock stayed above that 200-day line for about a week, and the PMs never piled in. There's a cautionary tale in there somewhere. I would need to see that thin red line taken and then survive a test from above to be convinced.
A truly interested trader, averse to risking a ton of capital on the equity could get long a November 17th $105 call for about $4.45, while selling three times as many November 17th $90 puts for about $1.05 a piece. The net debit comes to $1.30. So, this trader could end up losing his or her $1.30 should the shares remain between $90 and $1.05 through expiration.
Should the stock actually make a move beyond one of these strike prices, the trader is either long at a net basis of $106.30 (the 200-day line) or long three times as much at a net basis of $89.57 (the bottom of the chart). Personally, I find no shame in taking a pass on this one.