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3M Company Trails Industry Performance Post 3Q Earnings

MMM DHR CR HTHIY

Trades from $3

On Nov 28, Zacks Investment Research updated the research report on diversified industrial goods manufacturer 3M Company (MMM - Free Report) . The company is currently going through a lean patch post third-quarter 2016 earnings, with an average return of 3.8% compared with 7.4% for the Zacks categorized Diversified Operations industry. Despite inherent strengths, this Zacks Rank #3 (Hold) stock appears to be grappling with numerous challenges that are likely to weigh on its performance in the forthcoming quarters.

The earnings estimates of the company for the current quarter have decreased 1.6% and 3.1% in the last 30 days and 60 days, respectively to $1.90 per share with significant downward estimate revisions. The earnings estimate for the current year has also reduced from $8.23 to $8.18 in the last 30 days, signifying negative investor confidence.

3M also expects a lackluster performance in the fourth quarter and has narrowed its earlier guidance for 2016 during the third-quarter earnings release. Organic local-currency sales is expected to be flat compared with 0–1% growth expected earlier. The company currently anticipates 2016 GAAP earnings in the range of $8.15 to $8.20 per share compared with the earlier projection of $8.15 to $8.30.

3M is facing increased pension expenses as its workforce begins to retire. The related extra costs are a drag on the company’s bottom line. Given its international presence, adverse foreign currency translations are also likely to affect the company’s ability to realize projected growth rates in its sales and earnings. Fluctuations in foreign currency exchange rates affect the company’s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions.     

However, 3M has initiated some prudent steps to strengthen and focus on its core portfolio of businesses. Since 2012, the company has pruned its businesses from 40 to 26, thereby improving customer relevance, productivity and speed through a leaner operating structure. At the same time, 3M has maintained a steady investment in R&D to develop innovative products. The company expects to invest $1.8 billion in R&D in 2016 for higher organic growth and complement it through strategic acquisitions.

3M's global footprint, diversified product portfolio and the ability to penetrate in different markets have been its forte. During the five-year period of 2016–2020, 3M expects 8–11% growth in earnings per share driven by an organic sales growth of 2–5%. The company expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%. Furthermore, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500 to $700 million in annual operational savings by 2020, and an additional $500 million reduction in working capital. Whether such focused attempts will revive its growth momentum in the future remains to be seen.

Some better-ranked stocks in the industry include Crane Co. (CR - Free Report) , Hitachi, Ltd. (HTHIY - Free Report) and Danaher Corp. (DHR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Crane has a long-term earnings growth expectation of 9.1% and has beaten estimates in all the trailing four quarters for an average earnings surprise of 8.3%.

Hitachi has a long-term earnings growth expectation of 13% and has beaten estimates thrice in the trailing four quarters for an average positive earnings surprise of 103.5%.

Danaher has long-term earnings growth expectation of 11.9% and has beaten estimates thrice in the trailing four quarters for an average positive earnings surprise of 6.1%.

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