Things have been going pretty well lately for materials-science titan 3M (NYSE: MMM). The company's stock has handily outperformed the market over the past five years, as well as the stock of materials-science rival DuPont.
But since the company's Q2 earnings report, the stock has dropped, despite Q2 results that were in line with analysts' expectations. (The company itself doesn't issue quarterly forecasts.) And sadly for investors, we seem to be seeing a repeat scenario after the company reported Q3 earnings last week. The stock ended the day after the earnings announcement down nearly 3%.
3M's earnings report was perfectly fine but left the market wanting more. Image source: Getty Images.
3M: The raw numbers
| Metric | Q3 2016 Actual | Q3 2015 Actual | Growth (YOY) |
|---|---|---|---|
| Revenue | $7.7 billion | $7.7 billion | Flat |
| EPS | $2.15 | $2.05 | 4.8% |
| Operating cash flow | $1.9 billion | $1.7 billion | 11.8% |
| Operating income margin | 24.7% | 24.3% | N/A |
Data source: 3M. Chart by author. YOY = Year over year.
What happened this quarter
Although the numbers were perfectly fine -- not to mention in line with analysts' estimates -- the quarter was otherwise lackluster, with flat revenue and only a small uptick in margins. If there was a standout number, it was cash flow. Operating cash flow increased to $1.9 billion and helped generate a 19% increase in free cash flow.
That free cash helped the company reward its shareholders through $670 million in cash dividends and $774 million in share repurchases during the quarter.
The company's Achilles' heel continues to be its electronics and energy division, in which organic local-currency sales were down 8.1% because of a persistently weak consumer-electronics market and a project delay in the energy division.
In February, the company made the decision to retain and further invest in its health information systems business. And invest in it the company did this quarter. 3M acquired Swiss medical coding company Semfinder to assist in accessing international markets, and it entered into a collaboration with Alphabet's Verily to develop analytical software for health providers.
Management's take
Chairman, President, and CEO Inge Thulin felt good about the company's performance:
Our third quarter was marked by increased earnings, robust cash flow, and a strong, broad-based margin performance -- with each of our business groups posting margins of 22% or greater. At the same time, we continued to execute on business transformation while taking several actions to strengthen and focus our portfolio. We were also pleased to celebrate our company's 100th consecutive year of paying dividends, which we've increased for each of the last 58 years.
Looking forward
Probably the biggest news from the earnings report was the company's trimming of the top end of its 2016 earnings outlook. 3M updated its EPS forecast to be in the range of $8.15 to $8.20, down from a prior range of $8.15 to $8.30. The company also expects organic local-currency sales growth to be approximately flat, instead of its previous forecast of 0%-1%.
For 2017, management is predicting that the overall markets will move sideways but expects improved growth rates for its industrial and electronics and energy businesses in 2017 over 2016. Of course, given the poor performance of electronics and energy, that's not saying a whole lot. The company is set to share its full 2017 outlook on Dec. 13, so investors should make sure to stay tuned for that.
The company will probably continue to reward shareholders through dividend increases and share buybacks. After 58 straight years of dividend increases, including through the Great Recession, it's unlikely the company would stop them now. And earlier this year, the company's board approved a $10 billion share-buyback plan, indicating that more share buybacks are in the company's future.
In all, things look fine for 3M. But the market clearly wants to see more than just "fine." If the stock price continues to drop, then investors should seriously consider picking up these "fine" shares at a cheaper price.
