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The strong U.S. dollar against other currencies is tempering 3M's (MMM) earnings results - past quarter and next quarter according to the company's Q3 2012 earnings call held on October 23, 2012. But, this shouldn't be considered a negative reflection of the company, as even great companies can have tepid earnings when the macroeconomic environment is performing poorly.

The company reported revenue of $7 billion, which was down 0.4% year-over-year. Even though 3M reported 2% growth in the U.S. and 1% growth in Europe, Middle East and Africa, the company reported flat growth in Asia Pacific. The biggest negative related to earnings was due to a 3.1% foreign exchange hit, which was a result of the U.S. dollar remaining strong against the euro and other global currencies.

On another negative note, the company expects to experience a 2.5% foreign exchange penalty in the next quarter, noted market conditions are challenging and expects the situation to continue through the end of the year. The company reduced its outlook and contributed a large portion of the reduced outlook to Q2 weakness in semiconductors and hard disk drives. On a slightly positive note, the company believes the economy is stable, but doesn't expect an up-tick in the near future. 3M noted strength in Safety, Security and Protection Services, Electro and Communications, Display and Graphics and Health Care with Health Care posting double-digit organic growth.

The company reported double-digit organic growth in Latin America, and Mexico in particular had a strong quarter with 19% local currency growth.

3M considers China a long-term growth opportunity and will continue to invest in the region, even though China is currently experiencing some short-term challenges. 3M considers China to have a lot of future potential as it transitions from an export oriented economy to a consumer based economy.

The company noted it has transitioned from 6 business groups to 5 business groups in order to more closely support its customers.

Due to 3M's tepid outlook, the company's stock price has taken quite a hit over the last week or so as shown below:

With the pullback in 3M's stock price and its potential in China once the region recovers, an investor might consider a protected position in the company. A married put might be considered, as it provides for unlimited upside, while protecting against a large downside movement. The married put position may be entered by purchasing a put option against a stock. Typically, the expiration month of the put option is selected several months in the future in order to reduce the cost of the "put insurance" per day.

Using PowerOptions, a number of married put positions are available for 3M for April 2013 expiration as shown below:

The second position in the table looks attractive with a maximum potential loss of 4.3%, however this doesn't include expected dividend payments during the holding time. When including the expected dividend payments, the second position in the table has a maximum potential loss of 3.1%. To enter the position, the MMM 2013 April 90 put option can be purchased for $6.05 against a long position in the stock.

3M Married Put Trade

  • Buy MMM stock (existing or purchased)
  • Buy MMM 2013 April 90 Put at $6.05

A profit/loss graph for one contract of the position is shown below:

(click to enlarge)

For a stock price below the $90 strike price of the put option, the value of the married put position remains unchanged. And, if the price of the stock increases to above the $90 strike price of the put option, then income methods can be applied in order to receive income and reduce risk as taught by RadioActiveTrading.com.

Source: Investing In 3M In Spite Of The Strong U.S. Dollar