Back to top

Image: Bigstock

Why Is 3M (MMM) Down 11.5% Since Last Earnings Report?

Read MoreHide Full Article

It has been about a month since the last earnings report for 3M (MMM - Free Report) . Shares have lost about 11.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is 3M due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

3M’s Q2 Earnings & Reveneus Beat Estimates

3M’s second-quarter 2023 adjusted earnings (excluding $14.52 from non-recurring items) of $2.17 per share surpassed the Zacks Consensus Estimate of $1.65. The bottom line declined in double digits year over year. This includes a negative impact from pre-tax restructuring charges of $212 million.
 
3M’s net sales of $8,325 million outperformed the Zacks Consensus Estimate of $7,955 million. However, the top line declined 4.3% year over year due to an adverse foreign currency impact of 0.9% and a 1.2% negative impact from divestitures. Organic sales fell 2.2%.

Region-wise, sales in the Americas decreased 1.5% year over year, while that in the Asia Pacific declined 12.8%. Sales from business in Europe, the Middle East and Africa inched up 0.6%.

Segmental Results

The company reports top-line results under four business segments — Safety & Industrial, Transportation & Electronics, Health Care and Consumer.

Revenues from Safety and Industrial totaled $2,765 million, decreasing 5.5% year over year. The decline can be attributed to a 0.9% negative impact from adverse movements in foreign currencies. Organic sales declined 4.6% for the segment. The Zacks Consensus Estimate for Safety and Industrial segment revenues was $2,865.25 million.

Revenues from Transportation & Electronics totaled $2,191 million, reflecting a year-over-year decrease of 3.4%. The decline is attributable to a 1.3% adverse impact from movements in foreign currencies. Divestitures had a negative impact of 1.3%, while acquisitions benefited segmental revenues by 0.5%. Organic sales declined 1.3%. The Zacks Consensus Estimate for Transportation & Electronics segment revenues was pegged at $1975.34 million.

Revenues from Health Care were $2,075 million, down 4.8% year over year. The results were hurt by 0.8% and 4.1% impact from adverse foreign currency translation and divestitures, respectively. Organic sales were nearly flat in the reported quarter. The Zacks Consensus Estimate for Health Care revenues was pegged at $2,101.65 million.
 
Revenues from Consumer fell 2.7% year over year to $1,293 million. Organic sales decreased 2.2%. Movements in foreign currencies had a negative impact of 0.5%. The Zacks Consensus Estimate for Consumer segment revenues was $1,359.47 million.

Margin Profile

In the quarter under review, 3M’s cost of sales decreased 9.5% year over year to $4,606 million. Selling, general and administrative expenses jumped more than 100% to $12,204 million. Research, development and related expenses were nearly flat at $473 million.

In the second quarter, 3M reported an operating loss of $8.95 billion against the operating income of $110 million in the year-ago period. The downside was due to pre-tax charges of $10.3 billion related to its settlement with PWS on PFAS.

MMM’s adjusted operating income in the quarter dropped 14.5% year over year to $1,545 million. The adjusted operating margin was 19.3% compared with 21.6% in the year-ago quarter. The adjusted tax rate in the quarter was 19.1% compared with 19.8% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, 3M had cash and cash equivalents of $4,258 million compared with $3,655 million at the end of December 2022. Long-term debt was $12,954 million at the end of the second quarter compared with $14,001 million at the end of December 2022.

At the end of the second quarter, 3M generated net cash of $2,784 million from its operating activities, reflecting an increase of 30.2% from the year-ago quarter. Capital used for purchasing property, plant and equipment increased 5.4% to $852 million in the second quarter.

Adjusted free cash flow at the end of the second quarter was $2409 million, up 35.3% year over year. Adjusted free cash flow conversion was 105% at the end of the same period.

In the first half of 2023, 3M rewarded its shareholders with $1,655 million in dividend payments. The company did not repurchase shares in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, 3M has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 3M has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


3M Company (MMM) - free report >>

Published in