A month has gone by since the last earnings report for 3M (MMM). Shares have added about 4.9% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is 3M due for a pullback? 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 Surpass Earnings, Fall Y/Y on Weak Sales
3M has reported better-than-expected bottom-line results for the second quarter of 2020, with earnings surpassing the Zacks Consensus Estimate by 0.56%. However, sales lagged estimates by 1.27%.
Its adjusted earnings in the reported quarter were $1.78 per share, surpassing the Zacks Consensus Estimate of $1.77. However, the bottom line decreased 16.4% from the year-ago quarter figure of $2.13.
The results suffered from the adverse impacts of organic sales decline, various woes related to the pandemic, acquisitions/divestitures and forex woes (5 cents per share). However, savings from cost-related actions (to the tune of $400 million), lower tax rate and a fall in share count positively impacted results.
In the quarter under review, 3M’s net sales were $7,176 million, reflecting a decline of 12.2% from the year-ago quarter. Also, the company’s net sales lagged the Zacks Consensus Estimate of $7,269 million.
Results suffered from a 13.1% year-over-year decrease in organic sales, a 1.5% negative impact of divestitures and a 1.5% adverse impact of foreign currency translation. However, acquisitions had a positive impact of 3.9%. Notably, higher demand for respirator due to the virus outbreak added $225 million (or 2.8 percentage points) in organic sales in the quarter.
Business was weak in automotive OEM/aftermarket, general industrial, commercial solutions, healthcare elective procedures and office supplies. Partially offsetting these headwinds were strength across the biopharma filtration, personal safety, general cleaning solutions, home improvement, semiconductor and data center.
On a geographical basis, sales in the Americas decreased 12.7% year over year, while that in the Asia Pacific declined 8.5%. Business in the Europe, Middle East and Africa region was weak, with sales falling 16.4% year over year.
The company reports top-line results under four business segments — including Safety & Industrial, Transportation & Electronics, Health Care, and Consumer. The segmental information is briefly discussed below.
Revenues from the Safety and Industrial segment totaled $2,668 million, declining 9.2% year over year. The decline resulted from a 2.2% adverse impact of forex woes, a 0.9% negative impact of divestitures and a 6.1% decrease in organic sales.
Revenues from the Transportation & Electronics segment totaled $1,937 million, reflecting a year-over-year decline of 20.9%. Results were adversely impacted by an 18.9% fall in organic sales, a 0.9% impact of forex woes and a 1.1% negative influence of divestitures.
Revenues from the Health Care segment were $1,825 million, down 0.3% year over year. The positive impact of 17.9% from acquisitions was more than offset by the adverse impact of 12.4% from a fall in organic sales, 4.3% from divestitures and 1.6% from forex woes.
Revenues from the Consumer segment decreased 6.2% year over year to $1,238 million. Forex woes had an adverse impact of 1.2% and organic sales decreased 5% year over year.
In the quarter under review, 3M’s cost of sales declined 11.8% year over year to $3,805 million. It represented 53% of net sales compared with 52.8% in the year-ago quarter. Selling, general and administrative expenses decreased 5.5% year over year to $1,594 million. It represented 22.2% of net sales versus 20.6% in the year-ago quarter. Research, development and related expenses dipped 9.8% year over year to $424 million. It represented 5.9% of the quarter’s net sales versus 5.8% in the year-ago quarter.
Adjusted operating income in the quarter under review declined 17.3% year over year to $1,408 million. Operating margin decreased 120 bps year over year to 19.6%. Tax rate in the quarter was 20.7% versus 22.3% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the second quarter, 3M had cash and cash equivalents of $4,219 million, down 0.8% from $4,253 million at the end of the last reported quarter. Long-term debt balance inched up 0.2% sequentially to $19,276 million.
In the reported quarter, it generated net cash of $1,905 million, reflecting year-over-year growth of 14.6%. Capital used for purchasing property, plant and equipment declined 10% year over year to $379 million. Adjusted free cash flow in the quarter was $1,540 million, up 17.8% from $1,307 million generated in the year-ago quarter. Adjusted free cash flow conversion was at 149%.
During the first half of 2020, the company used $1,693 million for paying out dividends to shareholders and repurchased $366 million treasury shares. Notably, the company paid out dividends of $1,660 million and repurchased shares worth $1,101 million in the first half of 2019.
3M remains focused on generating healthy cash flow and ensuring the safety of its employees, shareholders and customers in the present environment. Also, cost-saving actions, and investment in productivity and growth remain priorities for it.
It mentioned that sales improved (on a year-over-year basis) in low-single digits so far in July. Operating margin (adjusted) in the third quarter is expected to be 20-21%. Global economy too is predicted to show sequential improvement in the third quarter.
The company targets to manufacture 2 billion respirators in 2020, more than three times the 2019 level. Further, it expects respirators to boost organic sales by 300-350 bps in the third quarter of 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
Currently, 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 second quintile 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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