3M's Lowered Outlook Doesn't Concern Us

| About: 3M Company (MMM)

On Tuesday, 3M (NYSE:MMM) reported mixed third-quarter results and lowered its revenue and earnings per share outlook for 2012. Though we plan to make a few slight changes to our valuation model, we don't expect a material change to our fair value estimate.

3M's revenue dropped 0.4% from the same period a year ago, though organic local-currency revenue advanced 2.2%. On an organic local-currency basis, revenue increased 4.3% in its health care business, 3.3% in its industrial/transportation segment, 1.4% in its consumer/office segment, 1.3% in its display/graphics segment, 0.7% in its safety/securities segment, and 0.1% in its electro/communications segment. However, with the exception of its display/graphics segment and electro/communications segment, performance decelerated from the pace of expansion earlier this year. It's therefore not surprising that management lowered its 2012 organic local-currency outlook to the range of 2%-2.5% (was 2.5%).

The firm's consolidated business-segment operating income advanced 6.1% to $1.68 billion, thanks primarily to strength in its industrial/transportation (automotive and aerospace) and health care (food safety, skin/wound care) segments. The only business segment to experience an operating-income decline was its safety/securities (roofing granules and security systems) operations, which fell roughly 3%. Further, it was encouraging to see that all six of its business lines posted 21%+ operating margins during the period. We expect consolidated operating income margins will continue to stay above those levels and potentially meet the high-end of management's guidance range of 21.5%-22% for the year. And while the firm posted solid 8.6% earnings per share growth during the period, to $1.65 per share, management lowered its earnings 2012 earnings outlook to the range of $6.27-$6.35 per share (was $6.35-$6.50). The revision includes a modest $0.03 in new acquisition-related costs.

The earnings outlook was certainly a disappointment, but 3M remains a cash cow, pulling in $1.35 billion in cash from operating activities (about 18% of sales) and $987 million in free cash flow (about 13.2% of sales) during the period. We expect cash flow generation to continue to be robust for the firm, supporting its strong Valuentum Dividend Cushion score, even as it pursues the acquisition of Ceradyne (CRDN). Please click here to learn how we evaluate dividends at Valuentum. We like 3M's business-segment/geographic diversification and its track record of continuous innovation. Though shares may face pressure as economic headlines disappoint, we would strongly consider adding the firm to our Best Ideas portfolio at the right price (below the low end of our fair value range, the mid-$70s).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.