It has been about a month since the last earnings report for 3M (MMM). Shares have lost about 0.3% 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 Q3 Earnings and Revenues Beat Estimates, Up Y/Y
3M reported solid third-quarter 2021 results. Its earnings surpassed estimates by 12.39% and sales exceeded the same by 3.18%.
Its adjusted earnings in the reported quarter were $2.45 per share, surpassing the Zacks Consensus Estimate of $2.18. The bottom line also increased 0.8% from the year-ago quarter figure of $2.43.
The results gained from lower tax rate (9 cents) and other tailwinds (8 cents). However, organic volume /productivity and other, price/raw material, foreign currency movements, and shares outstanding had adverse impacts of 2 cents, 12 cents, 1 cent, and 2 cents, respectively.
In the quarter under review, 3M’s net sales were $8,942 million, reflecting growth of 7.1% from the year-ago quarter. The company’s net sales also surpassed the Zacks Consensus Estimate of $8,667 million. Results benefited from a 6.3% year-over-year increase in organic sales and a 0.8% gain from movements in foreign currencies.
Region wise, sales in the Americas increased 7.9% year over year while that in the Asia Pacific grew 6.8%. Business in the Europe, Middle East and Africa region improved, with sales increasing 5.2% 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 $3,235 million, increasing 7.2% year over year. The improved performance resulted from a 6.1% increase in organic sales and a 1.1% contribution from movements in foreign currencies.
Revenues from Transportation & Electronics totaled $2,450 million, reflecting a year-over-year increase of 5.8%. Results gained from 5.1% growth in organic sales and a 0.7% contribution from movements in foreign currencies.
Revenues from Health Care were $2,249 million, up 4.1% year over year. The results benefited from a positive impact of 3.3% from organic sales and a 0.8% gain from movements in foreign currencies.
Revenues from Consumer increased 8.1% year over year to $1,525 million. Organic sales improved 7.6% and movements in foreign currencies had a positive impact of 0.5%.
In the quarter under review, 3M’s cost of sales increased 12.8% year over year to $4,853 million. It represented 54.3% of net sales compared with 51.5% in the year-ago quarter. Selling, general and administrative expenses jumped 8.5% to $1,819 million. It represented 20.3% of net sales compared with 20.1% in the year-ago quarter. Research, development and related expenses increased 4.6% to $482 million. It represented 5.4% of the quarter’s net sales.
Adjusted operating income in the quarter decreased 6.3% year over year to $1,788 million. Operating margin decreased 290 basis points to 20%. The tax rate in the quarter was 18.4% compared with 21.5% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the third quarter, 3M had cash and cash equivalents of $4,878 million, reflecting increase from $4,695 million at the end of the last reported quarter. Long-term debt balance decreased 0.5% sequentially to $16,193 million.
In the reported quarter, the company generated net cash of $1,874 million from its operating activities, reflecting a decrease of 24.4% from the year-ago quarter. Capital used for purchasing property, plant, and equipment decreased 6.8% to $343 million. Adjusted free cash flow in the quarter was $1,531 million, down 27.5% from $2,112 million generated in the year-ago quarter. Adjusted free cash flow conversion was at 107%.
In the quarter, the company used $856 million for paying out dividends to shareholders and repurchased $527 million treasury shares. It paid out dividends of $847 million and refrained from repurchasing shares in the year-ago quarter.
For 2021, 3M updated its projections. Adjusted earnings are expected to be $9.70-$9.90 per share compared with $9.70-$10.10 guided earlier. Sales are predicted to increase 9-10% year over year, with organic sales growth of 8-9%. The company also anticipates cash flow of $6.7-$7.3 billion from operating activities and capital expenditure of $1.5-$1.6 billion. Free cash flow for the year is predicted to be $5.1-$5.8 billion and free cash flow conversion is expected to be 90-100%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
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 downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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