3M (MMM) posted solid second-quarter earnings last week, but its underlying business segments continue to be a mixed bag. The firm's Health Care and Industrial/Transportation segments remain quite strong, but the company's Electro/Communications and Display/Graphics divisions continue to be pressured. We don't expect to make a change to our estimate of the company's fair value.
3M's organic local-currency sales advanced roughly 2% from the same period a year ago as difficult economic conditions and a strong US dollar weighed on performance. Revenue in the firm's Health Care segment jumped 5.4% on an organic local-currency basis, leading the firm's other five divisions. Such performance is consistent with our view for increased health care spending thanks to favorable political and demographic trends. The company's Display/Graphics segment lagged considerably, with revenue falling nearly 7% from the same period a year ago. Though management had some positive comments to say about its Display/Graphics segment a number of weeks ago, we don't think this translated effectively into the segment's top-line performance during the quarter.
The firm posted second quarter earnings of $1.66 per share, a company record, but up only about 3.8% from the same period a year ago. Cost of sales fell faster than the pace of its unadjusted sales decline (1.9%) in the period to drive operating margins materially higher. 3M's operating margin was 22.9% in the second quarter of 2012 versus 21.5% in the last year's quarter. We were pleased with management's ability to effectively manage its cost structure in the face of revenue headwinds largely driven by currency. However, we don't think management will be able to sustain second-quarter margin levels, given the firm's guidance range to achieve operating income margins in the range of 21.5% to 22.5% during the year (lower than the 22.9% posted in its second quarter).
Still, 3M maintained its full-year 2012 earnings expectations of $6.35 to $6.50 per share on organic local-currency sales growth of 2 to 5%. We think both targets are achievable. However, we remain on the sidelines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.