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Here's Why 3M Fell 15.7% in May

By Maxx Chatsko - Jun 10, 2019 at 12:07PM

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Investors continued to sell the news of a weak Q1 earnings report, but management made things worse with a controversial acquisition.

What happened

Shares of 3M (MMM -1.14%) fell nearly 16% last month, according to data provided by S&P Global Market Intelligence. It was the second straight month the stock cratered. It followed a weak first-quarter 2019 earnings report in late April that many investors interpreted with alarm. In addition to macroeconomic forces outside of the company's control, inefficient operations caused year-over-year adjusted operating income to fall for all five business segments.

Management followed that by making the largest acquisition in the company's 117-year history. 3M announced it would acquire wound care leader Acelity for $6.7 billion to bolster its own wound care unit. Investors wondered if that was really the highest priority for the struggling business.

A fist pounding a table as a declining stock chart displays on a tablet.

Image source: Getty Images.

So what

As The Motley Fool contributor Neha Chamaria noted, a worryingly high number of the company's product portfolios saw performance decline compared to the first quarter of 2018. The business has struggled to overcome the same headwinds for several consecutive quarters in a row, driven by weakness in consumer and electronics markets. Surprisingly, the high-growth Chinese market is actually the worst-performing for 3M.

That's the backdrop for surveying the Acelity acquisition. While the advanced wound care market is growing at a healthy 4% to 6% annually, it will take time to successfully integrate the start-up's assets. It's also worth wondering if 3M overpaid for the start-up, which was gearing up for an initial public offering (IPO), and if the need to supplement internal R&D efforts is a red flag.

Now what

In order to afford the Acelity acquisition, 3M announced it will reduce its share repurchase program from a previous target of $2 billion to $4 billion to no more than $1.5 billion in repurchases in 2019. That may not be such a big deal -- and that $1.5 billion could go even further now that shares have slid -- but investors and analysts are right to worry about all of the moving parts right now. It's going to take time to gauge whether or not the acquisition was worth it, or only masking deeper problems at the business.

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