To say 3M Company's (NYSE:MMM) fourth-quarter earnings report was a good one would be an understatement. It's not every day that a mature company delivers record sales, 20%-plus operating margin, and foresees an even stronger future. That's exactly what 3M offered its investors the morning of Jan. 25, when it reported solid quarterly and full-year numbers and raised its outlook for 2018, sending the stock higher.
Did I tell you about 3M's dividend increase yet? The industrials conglomerate's earnings report had everything a shareholder would want to see, and management said everything a shareholder would want to hear. I'm not surprised, as it was only recently that I made a no-brainer buy call on 3M.
3M results: The raw numbers
Here's a quick look at the key numbers from 3M's fourth-quarter earnings report:
|Metric||Q4 2017||Q4 2016||Year-Over-Year Change|
|Sales||$8 billion||$7.3 billion||9.6%|
|Net income||$523 million||$1.16 billion||(54.7%)|
|GAAP earnings per share (diluted EPS)||$0.85||$1.88||(54.8%)|
|Free cash flow (FCF)||$1.4 billion||$1.78 billion||(21%)|
Don't let that big drop in 3M's net income startle you. It's a one-off event, as the tax reforms that came into effect under The Tax Cuts and Jobs Act during the fourth quarter hit 3M with an additional tax expense of $762 million related to a "transition tax on previously unremitted earnings" from the company's non-U.S. subsidiaries. Excluding the expense, 3M's EPS climbed 11.7% year over year.
What happened with 3M this quarter
Better known for its Post-It notes and Scotch brand, 3M operates five broad business segments. That makes it important to see their individual performances to understand what market is boosting 3M's sales. The following table, which shows the year-over-year sales growth, both organic local currency (which excludes the impact of acquisitions, divestitures, and currency fluctuations) and total, for each 3M segment, should give you an idea:
|Business Segment||Organic Local-Currency Sales Growth||Total Sales Growth|
|Safety and graphics||10.7%||15%|
|Electronics and energy||11%||12.5%|
While 3M is seeing strong demand from each end market, its safety products and electronic materials, especially display systems, are hot sellers. There's one key point: 3M's recent acquisition of Scott Safety from Johnson Controls for $2 billion contributed significantly to its safety and graphics segment's top line, but including divestitures the net effect was almost nothing. In other words, organic growth is largely boosting sales for the company, which is a great sign.
The bigger takeaway is that 3M is witnessing all-around growth. Other notable highlights from the company's earnings report are:
- On a geographic basis, sales from EMEA (Europe, Middle East, and Africa) and the Asia-Pacific region climbed double-digit percentages during the fourth quarter.
- 3M's FCF conversion (percentage of net income converted to FCF) stood at 268%.
- 3M increased its dividend by 16%, marking the 60th straight year of a dividend increase. With that, 3M joined the elite group of a handful of companies that have raised dividends for at least six decades.
For fiscal year 2017, 3M's sales grew 5%, adjusted EPS climbed 12.4%, and FCF conversion came in at 100%, in-line with management's goals.
What management had to say
Chairman, president, and CEO Inge G. Thulin sounded exuberant about 3M's performance, pointing out how "robust organic growth across all business groups and geographic areas" drove the company's quarterly sales to record highs.
After a strong 2017, Thulin is looking forward to another great year. In Thulin's words:
Over the last several years, we have accelerated investments in the business -- including stepping up research and development and our commercialization efforts -- which is evident in our strong results. Going into 2018, we will increase investments further, and are positioned to continue generating premium value for our customers and premium returns for our shareholders.
Management's optimism reflects best in its updated outlook for fiscal year 2018.
Encouraged by strong end markets and lower anticipated corporate tax of around 20% to 22% versus 26% to 27%, 3M now expects to earn $10.20 to $10.70 per share in fiscal year 2018, which represents a solid 32% jump from the midpoint from fiscal year 2017. Earlier, management was guiding for a full-year earnings range of $9.60 to $10 per share.
Lower earnings due to the tax hit in 2017 magnifies 3M's growth estimate for 2018, but the company should continue to grow its local-currency organic sales by 3% to 5%. Management is also committed to converting 90% to 100% of net income into FCF. Going by the company's growth rate, Thulin should be able to deliver on his promises of generating premium returns for 3M shareholders.