Why Is 3M (MMM) Down 2% Since Last Earnings Report?

It has been about a month since the last earnings report for 3M (MMM). Shares have lost about 2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is 3M due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

3M Q2 Earnings and Revenues Beat Estimates, Up Y/Y

3M delivered solid second-quarter 2021 results. Its earnings surpassed estimates by 15.11% and sales exceeded the same by 4.82%.

Its adjusted earnings in the reported quarter were $2.59 per share, surpassing the Zacks Consensus Estimate of $2.25. The bottom line also increased 45.5% from the year-ago quarter figure of $1.78.

The results gained from year-over-year organic volume growth/productivity (89 cents), foreign currency movements (8 cents) and other tailwinds (6 cents). However, price/raw material, tax rate, divestitures and shares outstanding had adverse impacts of 17 cents, 3 cents, 2 cents and 3 cents, respectively.

Sales Details

In the quarter under review, 3M’s net sales were $8,950 million, reflecting growth of 24.7% from the year-ago quarter. The company’s net sales also surpassed the Zacks Consensus Estimate of $8,539 million. Results benefited from 21.4% year-over-year increase in organic sales and 4% gain from movements in foreign currencies. However, divestitures had a negative impact of 0.7%.

Region wise, sales in the Americas increased 26.1% year over year, while that in the Asia Pacific grew 20.2%. Business in the Europe, Middle East and Africa region improved, with sales increasing 28.7% year over year.

The company reports top-line results under four business segments — Safety & Industrial, Transportation & Electronics, Health Care and Consumer. The segmental information is briefly discussed below.

Revenues from Safety and Industrial totaled $3,254 million, increasing 22.4% year over year. The improved performance resulted from a 17.6% increase in organic sales and a 4.8% contribution from movements in foreign currencies.

Revenues from Transportation & Electronics totaled $2,482 million, reflecting a year-over-year increase of 28.1%. Results gained from 24.2% growth in organic sales and a 3.9% contribution from movements in foreign currencies.

Revenues from Health Care were $2,278 million, up 24.9% year over year. The results benefited from a positive impact of 23.2% from organic sales and a 4.3% gain from movements in foreign currencies. However, divestitures had a negative impact of 2.6%.

Revenues from Consumer increased 20.4% year over year to $1,482 million. Organic sales improved 17.8% and movements in foreign currencies had a positive impact of 2.6%.

Margin Profile

In the quarter under review, 3M’s cost of sales increased 24% year over year to $4,719 million. It represented 52.7% of net sales compared with 53% in the year-ago quarter. Selling, general and administrative expenses grew 9.5% to $1,746 million. It represented 19.5% of net sales versus 22.2% in the year-ago quarter. Research, development and related expenses increased 21.2% to $514 million. It represented 5.7% of the quarter’s net sales.

Adjusted operating income in the quarter increased 13.3% year over year to $1,971 million. Operating margin increased 240 basis points to 22%. The tax rate in the quarter was 21.5% versus 20.7% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, 3M had cash and cash equivalents of $4,695 million, reflecting increase from $4,636 million at the end of the last reported quarter. Long-term debt balance decreased 3.3% sequentially to $16,267 million.

In the reported quarter, the company generated net cash of $1,887 million from its operating activities, reflecting a decrease of 0.9% from the year-ago quarter. Capital used for purchasing property, plant and equipment increased 4% to $394 million. Adjusted free cash flow in the quarter was $1,566 million, up 1.7% from $1,540 million generated in the year-ago quarter. Adjusted free cash flow conversion was at 103%.

In the quarter, the company used $858 million for paying out dividends to shareholders and repurchased $503 million treasury shares. It paid out dividends of $846 million and repurchased shares worth $1 million in the year-ago quarter.

Outlook

For 2021, 3M updated its projections. Adjusted earnings are expected to be $9.70-$10.10 per share. Sales are predicted to increase 7-10% year over year, with organic sales growth of 6-9%.

The company also anticipates cash flow of $7.1-$7.7 billion from operating activities and capital expenditure of $1.8-$2.0 billion. Free cash flow in the year is predicted to be $5.1-$5.9 billion and free cash flow conversion is expected to be 90-100%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, 3M has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, 3M has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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