On October 28, 3M Company (MMM) reported its third quarter fiscal 2010 earnings of $1.53 per share, ahead of the Zacks Consensus Estimate. With a 13% increase in its earnings, the company’s sales improved in all its business and geographic regions. Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions over short and long-term periods.
Earnings Report Flashback
Revenues increased 11% year over year to $6.9 billion and was above than the Zacks Consensus Estimate of $6.81 billion. 3M delivered double-digit sales increases in four of its six business segments. The emerging markets were a strong support for the company’s impressive result in the quarter. The Asia-Pacific was the star performer amongst all geographic regions with a 28% sales increase.
Agreement of Estimate Revisions
Over the last 7 days, 11 out of 13 analysts have decreased their earnings estimate for the fourth quarter, while none increased their estimate. For 2010, 10 out of 12 analysts lowered their earnings estimate while 1 increased its estimate.
The analysts were somewhat disappointed by the company’s decreased guidance. Recent acquisitions made by 3M will be dilutive to fourth quarter earnings.
3M tightened its adjusted 2010 EPS outlook to $5.70–$5.74 from the prior range of $5.65–$5.80, with organic sales now expected to grow 13.5–14.0% compared with prior 13–15%. The 2010 guidance includes dilutive effects of October 2010 purchases of Attenti Holdings S.A. and Arizant Inc. and acquisition of a controlling interest in Cogent Inc. The company also decreased its operating margins expectation to 22.5% from its prior expectation of above 22.5%.
3M expects the acquisition deals to turn accretive in 2011. However, the company is expected to face headwinds from pensions and vacation policy changes accruals. These near-term headwinds including a lower base in 2010 were a matter of concern for the analysts. Over the last 7 days, 8 out of 17 analysts lowered their estimate for 2011.
The earnings trend over the last 30 days was similar to that in 7 days.
Magnitude of Estimate Revisions
The trend of estimate revisions for 3M has been downward over the last 7 days. Following the release of the third quarter results, estimate for the fourth quarter declined by 7 cents (from $1.35 to $1.28). The estimates for fiscal 2010 and 2011 were decreased by 6 cents and 7 cents, respectively.
Currently, the Zacks Consensus Estimate for the fourth quarter is $1.28 per share. For 2010 and 2011, the Zacks Consensus Estimates are $5.75 and $6.38 per share.
Our Recommendation
3M continues to deliver sustainable increases in sales, earnings and free cash flow. For four consecutive quarters, the company has generated net growth of about 8% to 9% above the market. The company’s strong results and continued outperformance strengthens our belief that 3M Co. will deliver stronger results ahead.
The company expects the collective end market demand in high growth economies to taper off toward the beginning of the fourth quarter, when markets adjust to new circumstances such as higher interest rates, lower stimulus funding or commodity inflation. The balance sheet is in good shape and puts it in a strong position, given uncertainty about the pace of the economic recovery.
The 3M brand is recognized and trusted around the world. Household names like Nexcare, Post-it, Scotch, Scotch-Brite, and Scotchgard are market leaders. This has led to household recognition of its brands across the globe. We believe that continued capital expenditure with new product launches should bolster its prospects across most end-markets.
However, the company’s growth objectives are largely dependent on timing and market acceptances of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to the market at acceptable price points.
Further, the results have been impacted by worldwide economic and capital market conditions. Besides, negative consumer sentiment is affecting the retail store traffic. On the corporate side, lower employment levels are negatively reducing office supply purchases in most companies.
3M Company together with its subsidiaries, operates as a diversified technology company with manufacturing operations spread over 60 countries worldwide. It has more than 35 business units organized into six segments: Consumer and Office, Display and Graphics, Electro and Communications, Healthcare, Industrial and Transportation, Safety, Security and Protection Services Business. Major competitors of 3M are Avery Dennison Corporation (AVY), EI DuPont de Nemours & Co. (DD) and Johnson & Johnson (JNJ).
We currently maintain our Neutral rating for the long term on 3M, with a Zacks #4 Rank (short-term Sell recommendation) over the next one-to-three months.
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