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3M Stands on Solid Footing Across Markets Amid High Costs

Zacks Equity Research

On Mar 25, 2019, we issued an updated research report on 3M Company MMM.

Year to date, this Zacks Rank #3 (Hold) stock has yielded a return of 7.4% compared with industry’s growth of 18.6%.

Existing Scenario

3M intends to become more competent on the back of product-portfolio solidification. The company's household products like Nexcare, Post-it, Scotch, Scotch-Brite and Scotchgard are market leaders in their individual categories. Also, its value model, comprising four priorities — Portfolio, Innovation, Transformation, and People and Culture — is likely to continue driving margins.

Moreover, 3M intends to finance new growth-based investments, acquire businesses and boost shareholder’s remuneration with increased liquidity. Notably, the company’s recent buyout of technology business of M*Modal will strengthen its Health Information Systems business over the long term. Also, it hiked the quarterly dividend rate by 16% in January 2018 and again by 6% in February 2019. Further, 3M’s strong liquidity position adds to its strength. For 2019, the company anticipates generating free cash flow of $5.8-$6.7 billion, higher than $4.9 billion reported in 2018.

However, rising cost of sales has been the major cause of concern for 3M over the past few quarters. The company's cost of sales jumped 3.9% in 2018. 3M perceives that material inflation (including tariff impacts) will linger in the upcoming quarters.

In addition, the company’s extensive geographical operations expose it to headwinds arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. As a matter of fact, in the fourth quarter of 2018, forex woes had an adverse impact of 2.3% on sales. For 2019, 3M expects unfavorable movements in foreign currencies to adversely impact sales by 1%.

Key Picks

Some better-ranked stocks in the same space are Carlisle Companies Incorporated CSL, Federal Signal Corporation FSS and United Technologies Corporation UTX. While Carlisle sports a Zacks Rank #1 (Strong Buy), Federal Signal and United Technologies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Carlisle surpassed estimates thrice in the trailing four quarters, the average being 15.00%.

Federal Signal exceeded estimates in the trailing four quarters, the average being 21.65%.

United Technologies surpassed estimates in each of the trailing four quarters, the average being 14.87%.

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