Just as a good tv series always leaves you with a cliffhanger, 3M (MMM 0.38%) earnings report left investors wondering just where the company might be heading in 2022. Management elected to defer giving full-year results until its strategic update due on February 14th.
The question now is whether there was enough in the earnings report and commentary to make you fall in love with this stock before then. Here's the lowdown.
Image source: Getty Images.
Results were better than expected
Starting with the positives. The headline results were better than management had previously guided toward:
- Full-year organic sales growth came in at 8.8% compared to the guidance range of 8% to 9% given in October, and after management told investors in early December that sales growth for the fourth quarter would come in toward the low end of implied guidance.
- Full-year adjusted earnings per share (EPS) came in at $10.12, compared to guidance of $9.70-$9.90 given in October.
Something positive happened with sales in December, and on the earnings call, CEO Mike Roman noted that "revenue in the quarter finished better than we expected across all businesses." While part of it came down to an increase in respirator demand due to Omicron, it's only part of the story. CFO Monish Patolawala said respirator revenue came in $40 million better than expected in the quarter, but the increase is worth less than 0.5% of fourth-quarter 2020 sales.
Management's comments in early December had implied a decline in fourth-quarter revenue of up to 2%, when in fact organic local-currency sales increased 1.3% in the fourth quarter on a year-over-year basis.
Whichever way you look at it, 3M had a good December, which bodes well for the start of 2022.
Image source: Getty Images.
Three positives for 2022
There are some potential positives for investors to look forward to in 2022.
First, some of its key end markets look ripe for recovery. For example, the automotive (original equipment manufacturer, or OEM and aftermarket) market looks set for a substantive pick-up in growth in 2022. Patolawala said 3M's automotive OEM sales were up low double digits for the full year compared to global light-truck and car industry production growth of 2%. Given that forecasters predict a 9% growth in light-vehicle production in 2022 due to an easing in the auto-chip shortage, 3M could have a good year in the automotive sector.
Moreover, an improvement in the overall semiconductor shortage will help 3M's electronics and consumer electronics-based sales. And finally, management noted that U.S. elective medical procedures are still running at only 90% of pre-COVID levels, so there's a growth opportunity in 3M's healthcare (notably wound care) business as procedures improve through 2022.
Second, adjusted free cash flow (FCF) generation of $6 billion means the company has plenty of financial firepower to restructure and make acquisitions, even if you take out the $3.4 billion in dividends paid. The stock's current dividend yield is 3.4%, and it trades at less than 17 times 2022 FCF.
Third, Patolawala said there would be $70 million of carryover benefits from restructuring benefits that could be realized in 2022. In addition, 3M is starting to push through price increases with a 0.1% year-over-year increase in the second quarter, leading to a 1.4% year-over-year increase in the third quarter and then a 2.6% year-over-year increase in the fourth quarter.
Image source: Getty Images.
What management didn't tell investors
Turning to the less positive news, 3M is highly likely to face some revenue headwinds from declining respirator sales in 2022. Patolawala said the business had sales of $600 million in 2019, $1.4 billion in 2020, and $1.5 billion in 2021. For reference, overall company sales were $35.3 billion in 2021. So it's reasonable to expect downward pressure on those sales in the coming years.
Meanwhile, the price hikes are one thing, but as you can see below, they did not fully offset raw material cost increases to contribute to margin growth positively. It's one of the key numbers 3M needs to improve.
Vertical Research analyst Jeff Sprague specifically asked on the matter during the earnings call. In response, Patolawala said that pricing would be a tailwind, and "I think the first half is going to be tougher than the second half of 2022 when it comes to inflation."
Data source: 3M presentations. 100 basis points equal 1%.
3M Stock, buy or sell?
On balance, I'd rather be a buyer than a seller, but there's no need to take a position either way. 3M stock is a good option for dividend-seeking investors, and as discussed above, some of its key end markets look likely to recover in 2022. On the other hand, the company is struggling to offset raw material cost increases and grow margins. Investors will have to wait until mid-February for specific guidance on those issues in 2022. There's no harm in waiting until then.
