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Dow-30 Earnings: 3M Company - First Quarter 2013
Multinational conglomerate 3M Company (MMM - Free 3M Stock Report) has reported first-quarter results. Net sales rose 2%, to $7.6 billion, which was an all-time high as far as the March period is concerned. Organic (local currency) revenues rose 2%, and acquisitions added another 2% to the top line. Currency impacts reduced sales by 2%, however. The revenue figure was about $165 million shy of our target and $175 million below the consensus estimate. Management blamed a low-growth economic environment and a strong U.S. dollar for the lackluster top-line performance. Gross and EBITDA margins were narrower than expected, due mostly to increased investments in areas such as product innovation and manufacturing. Consequently, operating income ticked up ever so slightly, to $1.6 billion. The company did, however, repurchase $805 million worth of its stock in the period, which allowed share earnings to inch forward by 1%, to $1.61. Both Value Line and most Wall Street analysts have been looking for share net of $1.65.
Looking more deeply at the company's many business groups, the Industrial segment had the biggest impact on the top line. Local-currency sales increased 3%; the acquisition of Ceradyne added 4%; and foreign exchange headwinds cost 2%. The aerospace, industrial adhesives and tapes, personal care, and liquid filtration all had better quarters year over year, while the advanced materials unit experienced a top-line decline. Sales grew, or stayed flat, in all geographies. The EBITDA margin here was much softer than we anticipated, however, so operating income fell 3%.
Safety & Graphics revenues rose 2%, as internal growth of 2% and the additional sales related to the acquisition of Federal Signal Technologies was offset by currency translation reductions. Top-line gains were strongest in commercial graphics, architectural markets, building & commercial services, and personal safety. Both the traffic safety and security businesses experienced softness. Margins here also suffered in the quarter, so operating income expanded by less than 1%.
The Health Care group managed to report a 3% sales gain in the period, thanks to strong organic growth of 4% and the addition of CodeRyte (less than 1%). Revenues were solid across the portfolio, though the strongest growth was notched in the areas of food safety and health information systems. Also, double-digit growth in Canada/Latin America was notable. The operating income increased 1%, to $404 million, which was slightly below expectations.
Revenues at Electronics & Energy fell 3%, due to lower volumes and negative foreign exchange impacts. Industry demand for electronics remained soft, while energy-related sales ticked up slightly. The top line was weakest in mature geographies and Asia/Pacific, though there were some pockets of strength (Canada and Latin America). The group's operating income tumbled 16%, due to lower margins.
Finally, the Consumer group reported a 2% sales gain in the opening stanza on the back of internal growth of 4%. The consumer health care, DIY, and home care businesses were the standouts this time around, and sales were up across the globe with the exception of Europe. Operating income here was flat.
Management had a more somber tone than usual in the conference call, and the company reduced its full-year share-earnings guidance from $6.70-$6.95 to $6.60-$6.85. Management blamed the strong U.S. dollar and soft demand in particular end markets, especially consumer electronics and infrastructure-related sectors, for the guidance reduction. Still, the tone was upbeat when it came to discussing strategic objectives, productivity improvement, manufacturing efficiencies, and ongoing innovation efforts.
MMM shares, a Dow-30 component, were off about 3% after the earnings release, as investors were obviously expecting a better performance. Still, the stock continues to trade just below its 52-week high.
Note that we have updated our presentation to reflect the new guidance. We have trimmed about $300 million from our top-line call, which now stands at $31.0 billion and would represent growth of about 3%. We have also cut $0.12 from our share-net target, which is now near the midpoint of management's new range at $6.70. The 2012 figure was $6.32, so growth would approximate 6%. As far as our investment advice goes, we think most conservative, income-oriented investors would do well here, as both the dividend and long-term capital gains potential are worthwhile. The stock also is an excellent selection in terms of Safety for the risk averse.
About the Company: 3M, a component of the Dow Jones Industrial Average, is a diversified manufacturer that sells more than 50,000 products in 65 countries. Its six business segments include: Industrial & Transportation (34.6% of 2012 revenues); Healthcare (17.3%); Display & Graphics (11.9%); Consumer & Office (14.4%); Safety, Security & Protection (12.7%); and Electro & Communications (10.8%).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.