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Why Is 3M Company (MMM) Down 6.1% Since its Last Earnings Report?

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A month has gone by since the last earnings report for 3M Company MMM. Shares have lost about 6.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is MMM due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

3M Beats Q4 Earnings on Organic Growth, Guides Up

Driven by broad-based organic growth across all segments and geographies, 3M reported strong fourth-quarter 2017 results with healthy year-over-year increase in adjusted earnings and revenues. GAAP earnings for the reported quarter were $523 million or 85 cents per share compared with $1,155 million or $1.88 per share in the year-earlier quarter. The year-over-year decline in GAAP earnings despite higher sales was largely due to tax expense of $762 million or $1.25 per share.

Excluding non-recurring items, adjusted earnings for the quarter were $2.10, which comfortably beat the Zacks Consensus Estimate of $2.03. Adjusted earnings for 2017 were up 12.4% year over year to $9.17 per share.      

Net sales were record high for fourth quarter at $7,990 million, up from $7,329 million in the year-ago quarter, and exceeded the Zacks Consensus Estimate of $7,878 million. Foreign currency translation impact increased sales by 2.7%, while organic local-currency sales improved 6% and acquisitions (net of divestitures) increased sales by 0.3%. Net sales for full year 2017 were $31,657 million compared with $30,109 million in 2016.

On a geographic basis, total sales increased 14.4% in Asia Pacific, 4% in Latin America/Canada, 3% in the United States and 17.1% in EMEA (Europe, Middle East and Africa). From a segment perspective, total sales increased 12.5% in Electronics and Energy, 6% in Health Care, 6.9% in Industrial, 7.3% in Consumer, and 10.7% in Safety and Graphics. Operating income in the reported quarter increased to $1,821 million from $1,665 million in the year-ago-quarter, resulting in respective operating margins of 22.8% and 22.7%.

Segment Results

Industrial segment sales increased 6.9% year over year to $2,718 million with improvement in all regions, driven by higher sales of automotive and aerospace solutions, industrial adhesives and tapes, and separation and purification sciences products. Operating income decreased 5.5% year over year to $527 million for operating margin of 19.4%.

Health Care segment sales improved 6% to $1,474 million in the reported quarter, driven by higher sales in food safety, health information systems and medical consumables. Operating income increased 12.3% year over year to $464 million for operating margin of 31.5%.

Consumer segment revenues were $1,174 million, up 7.3% year over year, driven by higher sales in home improvement, stationery and office and consumer health care. Operating income was $269 million, up 17.6% year over year for operating margin of 22.9%.

Safety and Graphics segment sales increased 15% year over year to $1,545 million, owing to higher sales in personal safety, roofing granules and transportation safety. Operating income increased 50% year over year to $406 million for operating margin of 26.3%.

Electronics and Energy segment revenues were $1,321 million, up 12.5% year over year due to growth in electronics material solutions and display materials and systems. Operating income was up 2.6% year over year to $334 million for operating margin of 25.2%.

Balance Sheet and Cash Flow    

Cash and cash equivalents at year-end 2017 were $3,053 million compared with $2,398 million in the prior-year period, while long-term debt stood at $12,096 million compared with $10,678 million at year-end 2016. Cash flow from operating activities for 2017 was $6,240 million compared with $6,662 million in 2016. Free cash flow generated for the quarter was $1,401 million, down from $1,773 million in the prior-year period.  

During the reported quarter, 3M paid $699 million in cash dividends and repurchased $504 million worth of shares.  

Guidance Raised

Buoyed by strong quarterly results and favorable growth dynamics, 3M raised its earlier guidance for 2018. The company currently anticipates earnings in the range of $10.20 to $10.70 per share, up from prior projections of $9.60–$10.00. Organic sales growth expectations are affirmed at 3–5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. In the past month, the consensus estimate has shifted by 6.2% due to these changes.

3M Company Price and Consensus

3M Company Price and Consensus | 3M Company Quote

VGM Scores

At this time, MMM has a subpar Growth Score of D, a grade with the same score on the momentum front. The stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregte VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been trending upward for the stock and the magnitude of this revision also looks promising. It comes with little surprise that MMM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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