The company is gradually making strides, though it still needs to go the extra mile to win investors’ trust ultimately.
As someone who has previously criticized 3M’s (NYSE: MMM) management for falling short of its projected targets and the persistent decrease in the firm’s profit margins, it is only fair to commend the company when it starts making amends. Although the latest earnings report painted a mixed picture, it nonetheless signalled incremental progress, and overall, it was a win for investors. But does this make the company’s shares a good investment? Here’s the full scoop.
Deciphering 3M’s recent earnings report
The earnings report and forecast require scrutiny, given the multiple factors involved. On a headline basis, the information can be summarized as follows:
The company’s second-quarter adjusted sales, tallying at $8 billion, surpassed the highest prediction within the guidance range of $7.7 billion to $7.9 billion.
The company retains its yearly organic sales growth guidance, projecting a decrease of 3% or to stay level with the 2022 figures.
While second-quarter adjusted earnings per share (EPS) of $2.17 considerably exceeded the guidance of $1.50-$1.75, the management only marginally bumped up the midpoint of its annual adjusted EPS forecast by $0.10, altering it from a previous range of $8.50-$9.00 to $8.60-$9.10.
At a glance, the results suggest a company on par with its annual sales expectations, albeit with a slight upgrade in full-year earnings predictions, despite a second-quarter performance that beat expectations.
Understanding the finer points
A detailed analysis of the situation reveals a different story. An alternative interpretation of the results is as follows:
3M’s target markets show signs of decline in 2023, and sales are not up to the mark.
The main takeaway is that 3M is gradually, albeit cautiously, improving its margin performance, a development likely to appeal to investors.
The overall picture is a blend of positive and negative outcomes.
First, the drawbacks. 3M’s management is in danger of missing its annual organic sales growth projections. The company’s inability to meet its forecasts has been a topic of prior discussions. Fast forward to the latest earnings call, and CFO Monish Patolawala informed investors that “We currently see organic growth tracking to the lower end of our range of flat to minus 3%” due to weakness in key sectors such as China, consumer electronics, consumer retail, and industrial markets.
Additionally, the company only managed to surpass its second-quarter organic sales growth forecast because the impact of foreign currency fluctuations was less severe than expected. In my analysis, its organic sales growth, excluding foreign exchange impacts, was at the upper limit of the forecast but wouldn’t have exceeded by a noteworthy amount.
Lastly, the management’s predictions for the drop in disposable respirator sales in 2023 were too optimistic. It anticipates a $550 million decrease in 2022, against the initial forecast of $450 million to $550 million.
To sum up the downsides, 3M’s target markets are on a downturn, and the management seems to have been too hopeful.
On a brighter note
In retrospect, criticism comes easily, but forecasting the economy’s trajectory in 2023 is challenging. Moreover, 3M is not alone in grappling with the slump in the consumer electronics, retail, and Chinese markets this year. The downward trend is well recognized, and management deserves some leniency.
Furthermore, 3M appears to be advancing on margin improvements. Patolawala advised investors to anticipate an operating income margin in the 19.5%-20% range for the entire year, an upgrade from the previous estimate of 18.5%-19%.
While this might not seem significant, it’s important to remember that 3M’s target markets are weakening, suggesting a decrease in volume growth. It is particularly challenging for a company like 3M that relies on volume growth to boost profit margins. Due to lower-than-anticipated raw material and energy cost inflation, the management’s restructuring efforts seem to bear fruit. They are contributing to enhancements in supply chain operations and streamlining its corporate structure.
Should one invest in 3M stock?
If the immediate market environment is a concern, investing in the stock might not be wise, given the declining performance of 3M’s target markets. However, if 3M can achieve its margin targets for 2023, investors can gain confidence that the management is making headway toward its long-term goals. Moreover, 3M exceeding predictions and increasing annual earnings forecast is encouraging and what investors want to see from the company.
The results might not be the breakthrough some hoped to make the stock a worthy investment. Nonetheless, they represent a move in the right direction, and 3M is certainly a stock to watch.
While 3M’s recent financial performance isn’t the groundbreaking shift some investors anticipated, it marks progress in a positive direction. The company’s ability to meet its margin targets amidst challenging market conditions indicates a commendable stride toward its long-term objectives. With a blend of good and bad news, 3M presents a complex but compelling picture for investors, making it a stock worth tracking. If you’re an investor with a longer time horizon and have faith in the company’s restructuring efforts and margin improvements, you may find this a suitable time to keep a close eye on 3M.
