A month has gone by since the last earnings report for 3M (MMM - Free Report) . Shares have added about 7.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is 3M due for a pullback? 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 Company Earnings, Revenues Miss Estimates in Q3
3M reported disappointing results for third-quarter 2018 with both earnings and revenues missing estimates.
The company's adjusted earnings in the reported quarter were $2.58 per share, missing the Zacks Consensus Estimate of $2.70. However, earnings recorded an increase of 10.7% from the year-ago tally of $2.33.
In the third quarter, 3M Company's net sales were $8,152 million, reflecting a decline of 0.2% from the year-ago quarter. The decrease was due to 1.5% negative impact from divestitures and 1.7% negative impact from foreign currency translation. This was partially offset by 1.2% gain from pricing, 1.7% gain from acquired assets and 0.1% favorable impact from volume growth.
Notably, the top line missed the Zacks Consensus Estimate of $8,421 million.
On a geographical basis, sales in the United States increased 1.3% year over year, while that generated in the Asia-Pacific grew 1.6%. Europe, Middle East and Africa's sales declined 3.9% and that from Latin America/Canada decreased 5.5%.
The company reports net sales under five segments — Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. The segmental information is briefly discussed below:
Revenues from the Industrial segment came in at $3,023 million, flat year over year. Results were driven by 2.2% growth in organic sales, offset by 2.1% negative impact from foreign currency translations and 0.1% negative impact from divestitures.
Revenues from the Safety and Graphics segment totaled $1,660 million, increasing 7% year over year. The improvement came on the back of 2.2% gain from organic sales growth as well as 7% gain from acquisitions, net of divestitures. This was partially offset by 2.2% negative impact from foreign currency translations.
Revenues from the Health Care segment were $1,445 million, reflecting a decline of 2.7% year over year. The decline was attributable to 1.1% fall in organic sales and 1.7% negative impact from foreign currency translations.
Revenues from the Electronics and Energy segment totaled $1,443 million, decreasing 4.8% year over year. The decline was due to 6.1% negative impact from divestitures and 1% negative impact from foreign currency translations. This was partially offset by 2.3% gain from organic sales growth.
Revenues from the Consumer segment fell 3.4% year over year to $1,235 million. The decrease was attributable to 2% fall in organic sales and 1.4% negative impact from foreign currency translations.
In the quarter under review, 3M Company's cost of sales increased 2.5% year over year to $4,159 million. It represented 51% of net sales compared with 49.7% in the year-ago quarter. Selling, general and administrative expenses decreased 5.5% to $1,547 million. It represented 19% of net sales versus 20% in the year-ago quarter. Research, development and related expenses were $430 million. It represented 5.3% of net sales versus 5.7% in the year-ago quarter.
Operating income in the quarter under review increased 0.4% year over year to $2,016 million. Operating margin grew 10 basis points to 24.7%.
Balance Sheet and Cash Flow
Exiting the third quarter, 3M Company's cash and cash equivalents were $3,185 million, up 13.7% from $2,801 million at the end of the last-reported quarter. Long-term debt balance increased 19.9% sequentially to $13,539 million.
In the reported quarter, the company generated net cash of $2,139 million, increasing 22.2% from the year-ago tally of $1,750 million. Capital used for purchasing property, plant and equipment increased 16% year over year to $377 million. Free cash flow generated was $1,762 million, increasing 23.6%.
During the third quarter, the company used $794 million for paying dividends to shareholders while repurchased $1.1 billion shares.
3M Company has revised down its adjusted earnings guidance for 2018 from $10.20-$10.45 to $9.90-$10.00 per share.
Organic sales growth guidance has been revised to about 3% from 3-4% projected earlier. Free cash flow conversion has been revised to 90-95% from 90-100% projected earlier. Effective tax rate is anticipated to be 20-21%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.88% due to these changes.
At this time, 3M has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #3 (Hold). We expect an in-line return from the stock in the next few months.