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Can Weak Organic Sales & Cost Woes Hurt 3M's (MMM) Q4 Earnings?

Zacks Equity Research

3M Company MMM is scheduled to release fourth-quarter 2018 results on Jan 29, before the market opens.

The company delivered better-than-expected results in one of the last four quarters while reported in-line results in two and lagged estimates once. Average earnings surprise was a negative 0.25%. In the last reported quarter, the company’s earnings of $2.58 were below the Zacks Consensus Estimate of $2.70.

In the past three months, 3M’s shares have increased 4.1% against the industry’s decline of 4%.

Let us see how things are shaping up for 3M this quarter.

Factors to Affect Q4 Results

3M will gain from its business transformation initiatives, solid product portfolio and investments to support innovation. These, along with the company’s focus on improving productivity, should help in margin expansion. Further, the policy of rewarding shareholders handsomely through dividend payments and share repurchases is a boon too.

3M’s key priorities — Portfolio, Innovation, Transformation, and People and Culture — are strengthening its capabilities.

On the flip side, 3M is currently dealing with high raw material costs — including those induced by tariffs. This headwind is likely to impact earnings per share by 15 cents in 2018 (versus the earlier negative impact of 5-10 cents), with pricing actions likely to bring in some relief. In addition, unfavorable movements in foreign currencies are predicted to adversely influence earnings by 5 cents (versus 10 cents benefit anticipated earlier).

Though quarterly projections are not provided by 3M, a look at the company’s annual figures will fairly provide a picture for the to-be-reported quarter. Organic sales are predicted to grow 3% year over year in 2018 versus 3-4% mentioned earlier. Adjusted earnings per share are anticipated to be $9.90-$10.00, down compared with $10.20-$10.45 stated previously. This downward revision in earnings estimates takes into account lowered organic projection, and higher adverse impacts of foreign currency translation and elevated raw material costs.

We provided our revenues estimates for 3M’s segments here. For the fourth quarter of 2018, the Zacks Consensus Estimate for revenues of 3M’s Industrial, Safety and Graphics, Electronics and Energy, and Consumer segments are pegged at $2,987 million, $1,586 million, $1,337 million and $1,196 million, respectively. These estimates reflect growth of 9.9% for Industrial, 2.7% for Safety and Graphics, 1.2% for Electronics and Energy, and 1.9% for Consumer from the respective revenues generated in the year-ago quarter. However, the Health Care segment’s revenues are pegged at $1,473 million, down 0.1% year over year. This segment suffers from weakness in the drug delivery business.

Earnings Whispers

Our proven model provides some idea about the stocks that are about to release their earnings results. Per the model, a stock needs a combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The case with 3M has been provided below.

Earnings ESP: 3M has an Earnings ESP of -1.84%. The Most Accurate Estimate of $2.23 is below the Zacks Consensus Estimate of $2.27.

3M Company Price, Consensus and EPS Surprise


3M Company Price, Consensus and EPS Surprise | 3M Company Quote

Zacks Rank: 3M currently carries a Zacks Rank #3.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Two companies in the industry that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Griffon Corporation GFF currently carries a Zacks Rank #3 and has an Earnings ESP of +37.5%.

United Technologies Corporation UTX currently carries a Zacks Rank #3 and has an Earnings ESP of +2.43%.

Another company in the Zacks Industrial Products sector that is likely to post upbeat earnings results this quarter is Colfax Corporation CFX.

Colfax currently carries a Zacks Rank #2 and has an Earnings ESP of +1.43%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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