Did 3M Buck the Trend or Is It Just in Denial?
(Bloomberg Opinion) -- 3M Co.’s decision to maintain its sales guidance for the year leaves the company dependent on a second-half turnaround that seems unlikely to materialize.
The maker of Post-it notes and industrial adhesives reported second-quarter earnings per share on Thursday that were significantly better than analysts had expected as the company’s cost-cutting plan took hold. But sales declined 0.9% in the period after backing out the effects of M&A and currency swings. That’s in line with CEO Michael Roman’s comments in May that the second quarter was trending toward a decline similar to the 1.1% drop that 3M saw in the first quarter. That performance leaves the company with a 1% organic sales decline for the first six months of the year. And yet the company is still holding out hope that it can get to a 2% gain for 2019. That seems a bridge too far.
Yes, the year-over-year comparisons get easier in the third and fourth quarters. But to push organic sales growth into positive territory, 3M likely needs to see a stabilization in China and automotive markets and avoid fresh trouble spots, RBC analyst Deane Dray wrote in report before the release. Other companies are much less sanguine about the prospects of such a recovery. Rockwell Automation Inc. also released its results on Thursday and noted weakness in markets with shorter sales cycles, including automotive, semiconductors and food and beverage. Rockwell is cutting its organic sales and earnings guidance for the full year because “uncertainty with respect to global trade is impacting some customers’ investment decisions.” Ford Motor Co., which released its results late Wednesday, did shrink its operating loss in China to $155 million in the second quarter, versus a loss of $483 million in the year-earlier period. The company said it was encouraged by that, but the Chinese economy and the vehicle market in particular are under “recent and persistent stress.” Ford’s second-quarter earnings and an updated full-year outlook both fell short of analysts’ estimates. Caterpillar Inc.’s results released on Wednesday also showed a significant slowdown in Asia amid competitive pricing pressure in China.
Taken together, it’s more evidence that a Federal Reserve interest-rate cut alone may not be enough to spur investment in manufacturing activity or counteract negative trends overseas and damaging trade policy. Industrial companies have thus far borne the brunt of fallout from the U.S.-China trade war, both through the cost of tariffs and the demand slump wrought by the associated uncertainty. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are set to travel to China on Monday for the first high-level, face-to-face negotiations since President Donald Trump and Chinese leader Xi Jinping agreed to a tentative cease-fire at the June G-20 conference. But there remain significant differences of opinion and there’s little sign the protracted conflict will be resolved in a tidy fashion any time soon.
On the bright side, 3M’s better-than-expected second-quarter earnings will go a good ways toward rebuilding the company’s reputation as a top notch operator that can defend its margins even in downturn. And CEO Roman avoids the credibility hit of yet another guidance cut (before this, the company had lowered its sales or earnings outlook five times in just one year). But the risk is that 3M has only kicked the can down the road.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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