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Why 3M Stock Dropped 19% in 2018

By John Bromels - Updated Apr 16, 2019 at 10:44PM

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The company's forecasts disappointed, but the business is strong.

What happened

Shares of 3M ( MMM -3.51% ) dropped 19% in 2018, according to data provided by S&P Global Market Intelligence. That performance was three times worse than that of the S&P 500, which was only down 6.2% for the year. The primary culprit was the company's cutting of its guidance three times during the year. 

So what

3M had some ups and downs in its earnings results for the first three quarters of 2018, but the one constant was cutting its 2018 earnings guidance. 

A man in a white shirt with his mouth open banging his hand on his forehead.

Top materials science company 3M underperformed the stock market in 2018. Image source: Getty Images.

In the first quarter, which 3M reported on April 24, earnings took a big hit thanks, in large part, to an $850 million settlement it paid to the State of Minnesota to resolve PFOA-related litigation. But Q1 sales in the company's electronics and energy segment also were surprisingly sluggish, which led the company to downgrade its guidance by 1 percentage point, to $10.20 to $10.55 per share from $10.20 to $10.70 per share.

Q2 brought year-over-year increases in revenue and earnings per share (EPS), plus a big guidance reset due to the divestiture of the company's communication-markets business. However, the company did reveal that without the divestiture factored in, it was trimming $0.10 off the top end of its guidance, which dropped to $10.45 per share. Possibly because of the shuffle, the market didn't seem fazed by this second guidance cut of the year.

That wasn't the case, though, for its third-quarter guidance cut. Weaker-than-expected Q3 results included a year-over-year sales decline of 0.2% and a big guidance cut that left the company forecasting just $9.90 to $10.00 per share. New CEO Mike Roman, who took over from longtime CEO Inge Thulin in July, blamed foreign currency headwinds, materials costs, and tariffs for the downward revision.

Now what

3M expects to be able to pass on its increased materials costs and tariff-related costs to consumers, which should help mitigate some of the problems it's experiencing. It's also worth noting that even throughout all of this, 3M posted 3% growth in the first three quarters of 2018, which is impressive for a century-old industrial conglomerate. It also has been sporting gross margins of nearly 50%, which is incredibly impressive for a manufacturer.

Add all that to the company's storied dividend -- currently yielding about 2.8% -- and even though it's currently experiencing some short-term headwinds, 3M still looks like a worthwhile investment for the long term.

Check out the latest 3M earnings call transcript.

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