It isn't easy to know where to start with 3M's (MMM 0.96%) fourth-quarter earnings and full-year 2024 guidance. With the disappointing sales performance, the weak sales guidance, the margin outlook disappointment, or the earnings and cash flow guidance that leaves the company looking like an outstanding value stock? There's a lot to unpack here.
Key Data Points
3M's management disappoints on sales again
The industrial stock is down nearly 30% over the last decade and slightly more than 50% over the last five years. One of the reasons for this can be seen in the chart below. It's a disappointing track record of meeting its own organic sales growth, and it happened again in 2023, with full-year organic growth coming in with a 3.2% decline. This is after CEO Mike Roman reminded investors on Dec. 5 that management had previously guided toward the low end of the full-year range and it would come in at "about approximately minus 3%."
It's just a slight miss, and in a challenging year for its end markets, but this is not the first time management has disappointed investors this way.
Data source: 3M presentations. Chart by author.
3M's restructuring
Aside from the lackluster growth history, 3M management must also turn around its long-term downtrend in operating margins. To be fair, that's exactly what management is trying to do now with its restructuring initiatives. As a reminder, 3M will spin off its healthcare business in the first half of this year and is taking multiyear restructuring actions with a planned $700 to $900 million in total benefits paid for by $700 million to $900 million in restructuring and related charges.
The restructuring initiatives are long overdue and involve simplifying supply chains, cutting jobs, reducing facilities, cutting management layers, cutting back on less profitable product lines (including 5% of its consumer business), and transitioning to "an export-led model in approximately 30 smaller countries around the world," in Roman's words.
A cynic would argue that these initiatives might have been made earlier if management had a better handle on forecasting its sales growth and the strength of its underlying business. And that's not the only reason for disappointment.
Image source: Getty Images.
3M's disappointing guidance
There are three main points. First, full-year organic sales growth guidance is flat to 2%. Note that this guidance includes the healthcare segment, which will be spun off in the first half of 2024, and that management intends to give guidance for the remaining company after the spin takes place. Note also that healthcare was the only segment to eke out any organic sales growth last year, with 0.7%.
Second, management's full-year guidance calls for expansion of just 75 basis points (where 100 basis points, or bp, equals 1%) in operating margin, including restructuring actions. With the company planning to cut less profitable lines in 2024 and prioritize its most "exciting growth opportunities," it was reasonable to expect a bit more than that.
Third, the restructuring actions will be complete by the end of 2024. Still, management expects $250 million to $350 million in charges in 2024 on top of the $441 million in 2023 but only $150 million to $250 million in net benefit on top of the $417 million in 2023.
The good news, as CFO Monish Patolawala outlined on the earnings call, is that the actions will be complete by the end of 2024, and "the benefits will carry on into [20]25 and beyond at $700 million to $900 million." The bad news is that investors will need to wait to see the full benefits of the restructuring initiatives.
Image source: Getty Images.
What you need to believe to buy 3M stock
The headline guidance calls for earnings per share (EPS) of $9.35 to $9.75 and free cash flow (FCF) of around $5.3 billion. The midpoint of EPS guidance puts 3M on 10 times earnings and 10 times FCF. These are excellent multiples for a company growing roughly at the same pace as gross domestic product (meaning the economy at large) and in restructuring mode.
However, to buy the stock, you have to hold confidence in management's guidance, believe it's possibly being conservative in its mediocre-looking sales guidance, and have faith that its capital allocation policy won't change after the healthcare spin-off and legal settlements bring about multibillion-dollar cash calls. In addition, you need to trust that the restructuring's benefits will flow into the bottom line in 2025 and beyond.
All of this is fine, and 3M may be a fantastic investment at this level. Still, it requires you to believe that management with a track record of overpromising and underdelivering will start doing the opposite this year. No one said investing was easy.
