3M Warns on Weak Flat Panel Market; Stock Implications

by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

At 3M, Profit Warning Takes 9% Off Stock, Hits Dow Industrials

  • Summary: 3M's stock fell Friday by 9%, its largest one day percentage in over 8 years, after the company reported that it would miss its prior projection for Q2 earnings due to weak demand for optical films used in flat-screen TVs and monitors. Optical films accounted for about 8% of 3M's revenue in 2005. 3M now expects revenue of $5.7 billion, up about 8% year over year and close to the consensus estimate of $5.71 billion, but EPS below prior guidance of $1.14 to $1.17. 3M said manufacturers overestimated demand for LCD TVs ahead of the World Cup, and that manufacturers and retailers are now left with excess inventory, leading them to cut back on new orders.
  • Comment on related stocks/ETFs: Despite the fact that 3M's (NYSE:MMM) miss may have been exacerbated by loss of market share, as Kodak (EK), GE (NYSE:GE) and some Asian manufacturers have entered 3M's market, the company's comments confirm earlier data points suggesting weakness in the flat panel market. Specifically, flat panel manufacturers AU Optronics (NYSE:AUO) and LG Philips LCD (NYSE:LPL) earlier cut their estimates for Q2 sales and profits. The key question for investors now is what to do with the stocks in the flat panel supply chain that haven't yet pre-announced worse than projected earnings. Smart investors were steering clear of all the stocks in the flat panel "food chain" since the AUO and LPL pre-announcements, but the hit to 3M's stock suggests that the bad news isn't fully priced-in until it's explicitly announced. The stocks with potential exposure include glass manufacter Corning (NYSE:GLW), and chip vendors Genesis Microchip (GNSS), Pixelworks (NASDAQ:PXLW), Silicon Image (NASDAQ:SIMG) and Trident Microsystems (TRID). Perhaps weak flat panel TV sales could also hurt retailers Best Buy (NYSE:BBY) and Circuit City (NYSE:CC); they certainly won't get relief from sales of movie projectors. In the longer run, weakness in the flat panel stocks may be a buying opportunity, since this is a market with strong long-term growth prospects. Note Apple's recent decision to switch to flat panels only for its PCs and further market share gains by flat panel TVs at the expense of plasma and rear-projection TVs.

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