3M Company MMM seems to have lost its sheen, thanks to increasing costs and tax rates, weakness in cash flow generation, forex woes, and high debts. Lowered projections also have adversely impacted the company’s investment appeal.
The conglomerate currently has a Zacks Rank #4 (Sell) and a VGM Score of C.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company belongs to the Zacks Diversified Operations industry, which is at the bottom 40% (with the rank of 153) of more than 250 Zacks industries. We believe that the industry is suffering from adverse impacts of tariffs, high debts due to huge investments required for innovation, rising freight charges and scarcity of skilled workforce. Unfavorable movements in foreign currencies, Brexit and geopolitical tensions are other worries.
It is worth noting that 3M delivered weaker-than-expected results in two of the last four quarters while beating estimates twice. In the last reported quarter, its earnings surpassed the Zacks Consensus Estimate by 7.84%. The company’s average earnings surprise for the last four quarters was negative 1.41%.
A glance at 3M’s price trend in the past three months shows that it has lost nearly 9.1% compared with the industry and S&P 500’s declines of 5.7% and 1%, respectively.
Factors Hurting the Company’s Performance
Top-Line and Bottom-Line Weakness: The company’s second-quarter 2019 top-line results suffered from weakness in automotive and electronics businesses, divestiture impact, and forex woes. Weak sales, rise in costs of sales and the decline in operating results affected bottom-line results. Persistence of such headwinds can negatively impact 2019 results as well.
Notably, the company predicts year-over-year change in organic sales to be (1)-2% in 2019. This compared unfavorably with 3.2% organic growth recorded in 2018. Also, tax rate is expected to be 20-22% in 2019, whereas it reported 20% in 2018.
Earnings for the year will likely be $9.25-$9.75 per share, down from $10.46 recorded in 2018.
The company’s earnings estimates have been lowered, reflecting bearish sentiments. Over the past 60 days, the Zacks Consensus Estimate for 3M’s earnings has declined 0.2% to $9.28 for 2019 and 2.1% to $9.89 for 2020.
3M Company Price and Consensus
3M Company price-consensus-chart | 3M Company Quote
Cost-Related Woes & Cash Flow Weakness: 3M is exposed to headwinds arising from undue rise in the cost of sales due to higher raw material costs. The company recorded 2% and 1.7% increases in costs of sales in second and first quarters of 2019, respectively. Notably, its effective pricing actions are a relief. In addition, charges related to restructuring actions can adversely impact results.
In addition, we believe that weak cash flow generation can be concerning for 3M. It expects net cash flow from operating activities to be $6.3-$7 billion in 2019, down from the previously stated $6.4-$7.2 billion. Free cash flow is projected to be $4.6-$5.4 billion, down from the prior $4.7-$5.6 billion.
Headwinds Related to International Operations: 3M has operations in the United States; Europe, Middle East and Africa; Latin America/Canada; and the Asia Pacific regions. We believe that exposure in international arena has exposed the company to headwinds arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies.
Notably, forex woes hurt its sales by 1.8% in second-quarter 2019. An impact of 1% is predicted to adversely influence the company’s yearly sales.
Highly-Leveraged Balance Sheet: High debts can be concerning for 3M as it raises financial obligations and might adversely impact profitability.
The company’s long-term debt rose 14.9% (CAGR) in the last five years (2014-2018). Exiting the first half of 2019, its long-term debt was approximately $14.9 billion, reflecting increase of 11.2% from the 2018 level. Net interest expenses in the first two quarters of 2019 rose 33.1% from the year-ago comparable period.
Also, the company is more leveraged than the industry, with respective long-term debt-to-capital ratios of 60.5% and 56.8%.
3M’s Performance Versus Three Peers
The company underperformed its three industry peers — United Technologies Corporation UTX, Carlisle Companies Incorporated CSL and Danaher Corporation DHR. In the past three months, shares of United Technologies and Carlisle Companies gained 2% and 4.3%, respectively, while that of Danaher declined 0.7%.
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