MMM - Another Economic Bellwether Suffering From A Slowing Economy

| About: 3M Company (MMM)
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Shares of 3M Co (MMM) lost more than 5% over the past trading week. The diversified technology and industrial company reported its third quarter results on Monday before the market open.

Third Quarter Results

MMM reported third quarter revenues of $7.5 billion, down 0.4% on the year. Organic sales growth of 2.2% and the 0.5% contribution from acquisitions was offset by unfavorable exchange rates, which hurt sales by 3.1%. Revenues fell short of analysts expectations of $7.63 billion.

Profits rose 6.7% to $1.16 billion on the back of cost cutting and a good performance of materials used in cars and planes. Earnings per share rose from $1.52 last year to $1.65 per share over the past quarter. Earnings matched analysts expectations of $1.65 per share.

Operating expenses fell from $5.95 billion to $5.82 billion as cost consciousness has grown throughout the organization. This boosted operating margins by 200 basis points to 22.4%.

CEO and Chairman Inge G. Thulin commented on the results, "The 3M team delivered another strong operating performance in the third quarter. In the face of the current slow-growth economy, our businesses continued to grow organically and generated record profitability. All six of our businesses posted 21 percent-plus operating margins in the quarter, so we continue to execute well in 2012."


For the full year of 2012, MMM has updated its outlook based on the current economic realities. Full year earnings are anticipated to come in between $6.27 and $6.35 per share. Previously, the company guided for full year earnings of $6.35-$6.50 per share.

Organic, local-currency sales growth is expected to rise between 2 to 2.5 percent. This compares to a previous guidance of growth between 2 and 5%. A strong dollar will negatively impact revenues by an estimated 2.5%. Full year operating margins are expected to come in between 21.5% and 22%.


MMM ended its third quarter with $5.0 billion in cash, equivalents and current marketable securities. The company operates with $6.4 billion in short and long term debt, for a net debt position of $1.4 billion.

For the first nine months of 2012, MMM generated revenues of $22.5 billion. The company reported net income of $3.5 billion, or $4.91 per diluted share.

The market currently values MMM at $61 billion. Based on the full year revenue outlook of $30 billion, this values the firm at 2.0 times annual revenues. Full year earnings could come in at $6.31 per share, or $4.4 billion. This values the firm at 14 times annual revenues.

MMM currently pays a quarterly dividend of $0.59 per share for an annual dividend yield of 2.7%.

Investment Thesis

Year to date, shares of MMM have risen a modest 8%. Shares rose from low eighties in January to a peak of $95 earlier this month, before falling to $88 at the moment.

Over the past five years, shares are trading largely unchanged. Share fell to lows of $40 during the crisis in 2009 and recovered to levels approaching $100 per share in 2011. Between 2008 and 2012 the company grew its annual revenues from $25.3 billion to an estimated $30 billion. Net income rose from $3.5 billion to an estimated $4.4 billion, in the meantime.

Earlier this month, MMM announced the acquisition of Ceradyne (CRDN) for a total deal value of $860 million. The deal is expected to add roughly $0.5 billion in annual revenues to MMM.

Despite the softness, MMM remains a good investment in any long-term diversified investment portfolio. The current "softness" is not a problem of MMM alone. Earlier other economic bellwethers disappointed on their reported revenues including Caterpillar (CAT), Honeywell (HON) and General Electric (GE).

There are few triggers for the short run, but investors should expect modest capital gains and a decent dividend yield for the future.

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.