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3M Stock Is Still Attractive After Earnings Miss

Will Healy

3M (NYSE:MMM) stock plunged in Thursday trading on an earnings miss. MMM stock fell by about 13% as the company’s first-quarter results missed analysts’ consensus estimates on both the top and bottom lines. The 13% plunge was the largest one-day decline for MMM stock since the 1987 stock-market crash.

Big-Moat, Low-Growth 3M Stock Is Stuck in Neutral

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However, after the drop, the valuation of MMM stock has reached lower-than-average levels. Moreover, the company’s extensive record of dividend increases and its continuing innovation should bolster it over the long-term. Given MMM’s valuable product lines and its financial stability, the question of whether to buy 3M stock does not come down to if investors should do so, but to when they should buy it

MMM Missed Consensus Estimates by Large Amounts

In the first quarter, 3M earned $2.23 per share of MMM stock. That came in well below analysts’  consensus estimate of $2.50 per share and under the $2.49 per share the company made in the same quarter last year.

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Likewise, MMM’s revenue of $7.86 billion came in $160 million below what analysts, on average,  had expected. It also represents a 5.1% decline from the same quarter last year.

3M’s product lines go well beyond Post-it Notes and the tape found in desk drawers. MMM also sells products for cleaning, personal health care, home improvement, sports, and other items that consumers use every day. Both individuals and businesses utilize 3M ‘s products.

Despite the nominal strength of the economy, the net income of every division of 3M fell in Q1, and the top line of every segment except health care declined.  The health care division’s revenue only increased 0.3%. Moreover, the revenue of the company’s U.S. and Asia-Pacific regions dropped. In China, growth in Chinese currency, excluding acquisitions, dropped by 3.6%. In the U.S., MMM’s growth fell by a more modest 0.4%.

MMM Stock Is Cheap and May Become Cheaper

Nonetheless, InvestorPlace columnist Will Ashworth called MMM an equity to “buy and hold forever.” He may have a point. Despite the company’s results, it’s still faring much better than GE (NYSE:GE). Also,  the company’s 60-year streak of annual dividend increases should remain intact. Even though 3M’s profits declined, the company can easily afford to maintain and increase its current annual dividend of $5.76 per share.

The question is  whether traders  should buy MMM stock now or wait. Although 3M’s profit will probably increase very little this year, analysts, on average, predicts its profits will rise 7% in 2020. Furthermore, even after Thursday’s drop, the forward price-earnings ratio of MMM stock come in at about 16.8.

That is well below the average of MMM stock over the last five years. It also makes MMM much cheaper than Danaher (NYSE:DHR), another industrial conglomerate. As a result, making an initial purchase of MMM stock might make sense at this point.

However,MMM’s P/E multiple also remains higher than the low and mid-teen P/E ratios at which 3M stock traded immediately following the financial crisis. It might be a good idea to wait for the stock to reach such valuations again before buying a large amount of MMM. Still, the world has and will continue to benefit from 3M’s innovations. Consequently, MMM stock should be bought on the post-earnings  pullback.

Final Thoughts on MMM Stock

Although the multiples of MMM stock have been lower in the past, it now trades at levels that will benefit new, long-term investors.

However, MMM stock has recovered from more significant downturns. It will more than likely recover from this one too. Investors should also not forget that, despite the fluctuations of MMM stock, the company has increased its annual dividend  for 60 straight years.

With the demand for 3M’s products poised to continue to grow over the long-term, the question is not whether to buy MMM stock, but when to buy MMM.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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