3M (MMM 0.46%) chief financial officer Monish Patolawala's presentation at a Morgan Stanley conference on September 13th left investors unimpressed, and the stock sold off in its aftermath. While the company has significant legal issues, it's often forgotten that its operational performance has left much to be desired in recent years.
The stock naturally attracts value investors and income-seeking investors admiring its 5.8% yield, so is the dip a chance to buy or a sign of worse to come?
What 3M management said: Headline guidance
The market reaction to the presentation highlights one of the problems 3M faces right now. Yes, Patolawala did say that weaker end markets and foreign currency movements would likely lead to third-quarter revenue of $7.9 billion to $8 billion. And, yes, he did say 3M was seeing a "slow growth environment" in 2024.
However, on a more positive note, he reiterated that 3M was heading for the lower end of its full-year organic sales guidance for a 3% decline to being flat versus 2022 -- the same guidance on the second-quarter earnings call in July. He also said third-quarter earnings per share would be in the $2.25 to $2.40 range given in July.
What 3M management said: End market commentary
Furthermore, as previously discussed, it's no secret that some of its key end markets are weakening consumer spending, putting its full-year guidance in doubt. As such, it's no surprise to hear talk of slow growth in 2024 and slightly weaker sales expectations in the third quarter.
Continuing the glass-half-full perspective, Patolawala also said that, despite "significant slowness" in consumer spending and consumer electronics, he believes the company has got through the worst of the destocking.
In response to weaker sales and significant stock holdings, customers have been reducing inventory in 2023. When that ends, 3M's demand is likely to pick up. Finally, he also noted supply chains are "starting to heal," which could help with profit-margin performance
Investor patience is running thin
The market's reaction suggests the market is anxiously looking at the half-empty glasses and demanding a refill before the barrel runs dry. The problem is that 3M's management hasn't established a track record of meeting its initial full-year guidance, let alone exceeding it.
The chart below outlines its track record going back to 2014. So when management lowers its third-quarter sales growth guidance, after previously guiding to the low end of guidance for the full year, investors are tempted to assume 3M will miss its initial full-year guidance again.
Data source: 3M presentations. Author's analysis.
Indeed, a leading shareholder, German mutual fund manager Flossbach Von Storch, was reported to have written to the company earlier in the year expressing dissatisfaction that it was "increasingly hard to take confidence in your still positive statements regarding the underlying health of 3M."
Meeting guidance is more than a number
Meeting sales guidance, and particularly sales volume guidance, is crucial to a company like 3M that tends to generate margin expansion through building scale. If management misses its volume guidance, it logically follows it's likely to suffer some margin pressure as the company is structured for sales volumes of Y when they only come in at X.
This is a point almost explicitly acknowledged by Patolawala in the presentation when he discussed the slowing environment, saying, "We need to make sure we are agile versus being rosy about what an environment could be, but then it's too late to adjust for production."
He went on to say that a restructuring (one of a few that have taken place in recent years) took place in early 2023, resulting in 2,500 jobs lost "mainly driven by the fact that we were seeing lower volume come in."
Job cuts do tend to improve margins over time, but they are also costly, a waste of productive talent in a company's most valuable resource, and imply a cost structure in place that's based on overly optimistic assumptions.
Image source: Getty Images.
What 3M needs to do
The good news is there's a potential playbook by which 3M can recover lost ground. It starts with being more accurate with guidance and improving its underlying margin performance by structuring the company in line with sales volumes.
With the successful execution of these aims, the stock can build a recovery from here. Still, there must be hard evidence before investors feel entirely comfortable with the stock.
