3M Company (MMM – Free 3M Stock Report), a diversified manufacturer and technology conglomerate, recently reported second-quarter results. Sales grew 3%, to $7.8 billion; share earnings expanded at the same rate, to $1.71. The top-line figure was a hair below what both Value Line and most Wall Street analysts were anticipating, but the bottom-line result was in line with our expectation and the consensus target.
A closer look at the revenue number shows that internal growth came in at 2% and acquisitions added another 2% to sales, before negative currency impacts reduced the top line by 1%. Four of the company's five reporting segments achieved internal revenue growth, and local-currency sales increased in all geographies. From a profitability standpoint, 3M's EBITDA margins were narrower than expected, and net profit fell short of our target. However, a swift increase in share-repurchase activity enabled the company to meet share-earnings expectations.
The Industrial group had the best quarter out of the five businesses, as sales expanded 7%, to $2.7 billion. Internal sales gains were solid, at 3%, and the acquisition of Ceradyne added another 5%. The currency translation drag amounted to 1%. Results were good in all major geographies, and sectors of strength were aerospace, automotive aftermarket, liquid filtration, industrial adhesives & tapes, and automotive OEM. EBITDA growth was softer than we were targeting, however, at just 1%.
The Health Care division also performed well in the period, as sales rose 6% before foreign exchange headwinds of 1%. Growth was the strongest in health information systems, food safety, critical and chronic care, oral care, and infection prevention. The segment also notched notable top-line growth in Latin America, Canada, and the Asia/Pacific region, trends we expect to continue in the near term. On the downside, operating income growth came in on the low end of expectations, at 1%.
Safety & Graphics reported a 2% top-line gain in the period, as internal growth (2%) and the recent acquisition of Federal Signal Technologies (2%) was offset by currency translation (-2%). Results were mixed here, as growth in commercial graphics, personal safety, and building & commercial services was offset by declines in roofing, traffic safety, and security systems. A top-line decline in the United States was also unexpected. Moreover, EBITDA fell 10% in the quarter, as margins narrowed considerably.
The Consumer group notched a top-line gain of 1%, thanks to 3% organic growth. Negative currency effects and divestitures hurt the revenue figure to the tune of 2%. Business expanded in all geographies, with the consumer health care, home care, stationery, office supplies, and DIY units all aiding the group's cause. Operating income growth here was slightly better than expected, too, at 4%.
The Electronics & Energy segment was once again the clear laggard in the June quarter, as overall sales slipped 3%. The end markets remain soft, and electronics-related revenues continue to decline. Energy sales also slipped in the period, due to ongoing weakness in the renewable energy sector. Latin America was the only geography where the group managed to post a positive top-line comparison, and we suspect there was considerable weakness in Asia/Pacific, North America, and Europe. The group's EBITDA fell 16%, owing to weaker margins.
Investors' reactions to the news was expected, as the stock price fell slightly in the hours following the earnings announcement. Management blamed slow global economic growth for the sluggish performance on both the top and bottom lines, and continued to point to the company's ongoing investment efforts. The company was also quick to point out the significant amount of cash returned to shareholders in the period ($1.6 billion via dividends and repurchases).
We have made some adjustments to our estimates. The company's share-earnings guidance remains unchanged at $6.60-$6.85, and our share-net call is holding steady at $6.72. We did, however, cut a nominal amount from our top-line estimate, which now stands at $31.0 billion, and we significantly reduced our margin assumptions. Indeed, it seems 3M will be less profitable this year than we previously expected, and share-repurchase efforts will be stepped up considerably to make up the difference. In fact, management said buybacks will probably total about $3.5 billion-$4.5 billion this year, which is up from the previous range of $2 billion-$3 billion.
Our investment advice has not changed much from our last full-page review. We expect annual share-earnings growth to remain very healthy over the longer haul, but we think this high-quality stock is richly valued at the current multiple, and the dividend yield leaves a bit to be desired at 2.2%.
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.