The market was buoyed by 3M's (MMM 1.37%) recent results, and they certainly breathed new life into the ongoing bull vs. bear debate around the stock. So, I thought I'd look at the latest news surrounding this manufacturing giant and flesh out what the new data points now in play mean for this business and for the investment case for the stock.
Is it now time to buy 3M's stock?
Don't lose sight of operations with 3M
A lot of the headlines around 3M right now center on its ongoing legal issues, especially the status of lawsuits involving PFAS manufacturing and military-grade earplugs, and on the viability of its dividend in light of these issues. While those are clearly issues to consider, some investors tend to forget that 3M's operational performance has consistently disappointed in recent years.
The performance problems can be seen in a company's two most important metrics: revenue growth and operating profit margins. The former is sluggish at best, and as previously discussed, 3M's management has a poor track record of meeting sales guidance. Meanwhile, its operating profit margins have weakened over the last decade.
Key Data Points
Sales growth and margin expansion?
The two issues are linked in that a large part of 3M's margin expansion comes from growing sales volumes and then enjoying the benefits of scale (mass production, more bang for the marketing buck, etc.). However, suppose 3M keeps missing its sales guidance (presumably, this means it's missing its sales-volume expectations, too). In that case, its margins are always likely to come under pressure because the company will have a cost structure suited for a company with higher sales volumes.
In short, if 3M is going to convince investors it's on the right track entirely, it will need to demonstrate its management can meet its sales guidance and start to grow its profit margin again. In addition, in the spring, management launched a major restructuring program to reduce headcount, streamline its operations, reduce management layers, reduce complexity in its supply chain, and adjust its global marketing model.
Image source: Getty Images.
Did 3M deliver on revenue and margin this quarter?
It's a case of two steps forward and one step back. The "good" news on revenue is nuanced. On the one hand, the $8 billion in adjusted sales in the quarter was at the high end of the $7.9 billion to $8 billion that CFO Monish Patolawala told investors to expect in mid-September just two weeks before the quarter would end. On the other hand, 3M also lowered its full-year guidance for organic sales to decline by 3% compared to the flat-to-3% decline range given at the start of the year.
The good news on margin is more positive, and management lauded the impact of the restructuring activities in helping the company expand its adjusted operating profit margin to 23.2% from 21.6% in 2022's Q3. It's a good result considering that, except healthcare, all its segments reported year-over-year volume declines in Q3.
Moreover, it's even better considering that 3M's healthcare segment is the only one to report a single positive quarter of year-over-year organic sales growth this year.
|
Organic Revenue Growth |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Full-Year Guidance |
|---|---|---|---|---|
|
Safety & Industrial |
(6%) |
(4.6%) |
(5.8%) |
Down low-single-digits (LSD) |
|
Transportation & Electronics |
(8%) |
(1.3%) |
(1.8%) |
Down medium-single-digits (MSD) to flat |
|
Health Care |
1.4% |
0.10% |
2.4% |
Up LSD to MSD |
|
Consumer |
(6.8%) |
(2.2%) |
(7.2%) |
Down LSD to flat |
|
Total |
(4.9%) |
(2.2%) |
(3.7%) |
(3%) |
Data source: 3M presentations
In addition, Patolawala said the full-year operating margin would come in at about 20% compared to the 19% estimated at the start of the year and the 19.5% to 20% range given at the beginning of the year.
Buy, sell, or hold 3M stock?
The news on margin is positive and evidence that management is taking necessary action to restructure the company. The news on sales is less favorable, but there's little management can do about the economic environment. Note that 3M generated margin expansion in the quarter even with volume declines.
Still, there's an argument to be made for 3M's margins being previously weak because management hadn't structured the business correctly. The jury will want to see what kind of margin expansion 3M has in store next year after the initial impact of the restructuring actions starts to fade in year-over-year comparisons.
Moreover, with the healthcare business set to be spun off in early 2024, 3M could enter the year with all of its remaining three segments facing volume declines -- something that would pressure profit margin.
All told, the earnings have more positives than negatives, but cautious investors will want to see what kind of momentum on margin 3M can generate going into 2024 before buying in.
