3M Company's (MMM -0.66%) outlook meeting on Dec. 15 disappointed investors, with management cutting guidance for 2015. Guidance for 2016 looks OK, but a combination of interpreting management's commentary on end market trends and looking at the data suggests 3M could struggle to meet its expectations.
With this in mind, let's take a look at five key takeaways from the meeting.
Guidance not so bad
The market sold the stock off more than 6% on the day of the meeting, but the overall guidance wasn't anywhere near as dramatic. The key points:
- Full-year 2015 EPS guidance cut to $7.55 from a previous range of $7.60 to $7.65, implying a 1% reduction in earnings expectations at the midpoint.
- Organic sales growth of 1% in 2015, compared to previous guidance of 1.5% to 2%.
- Full-year 2016 EPS guidance range of $8.10 to $8.45, a 7% to 12% increase compared to 2015 guidance above.
- Organic local-currency sales growth of 1% to 3% in 2016, with the second half stronger than the first half.
- Organic growth to contribute $0.10 to $0.25 of the $0.55 to $0.90 in EPS increase in 2016.
As you can see above, the guidance reduction for 2015 isn't significant numerically; EPS growth of 7% to 12% in 2016 looks good under the circumstance of global industrial growth, which management sees as growing just 1% to 2% in 2016.
Moreover, EPS growth in 2016 is largely predicated upon improvements in things such as lower materials costs ($0.10 to $0.15), restructuring and productivity improvements ($0.25 to $0.40), share repurchases ($0.25 to $0.35), and retirement benefits ($0.25 to $0.35). It's not a great year for organic growth, but 3M isn't expecting it to be. That said, what is there to be concerned about?
The second cut only makes you wonder
This is the second guidance reduction in the last two months, an indication that conditions are deteriorating faster than management anticipated. The previous cut took place in the third-quarter earnings release on Oct. 22, when guidance was cut to $7.60-$7.65 (including $0.13 of restructuring charge) from the previous estimate of $7.73 to $7.93.
Sales growth downtrend
Organic sales are forecast to be negative in the fourth quarter of 2015, and CFO Nick Gangestad suggested they would be negative in the first quarter of 2016 as well. Moreover, as noted above, organic sales growth is now forecast to be just 1% in 2015, with management disclosing weakness in the fourth quarter from its consumer electronics and industrial businesses in the U.S.
Looking ahead to 2016, management is predicting organic local currency sales growth of 1% to 3%. This implies a pickup in organic sales growth in 2016, when its sales growth is clearly on a downtrend.
Volume growth?
In a previous look at the bull and bear case for 3M Company, I discussed how 3M's organic volume growth was slowing throughout the year, and with the fourth quarter set to be tough, the pressure on the company to maintain pricing growth will only increase.
Data source: 3M company presentations.
To be fair, a question on pricing came up in the investor meeting, and Gangestad replied that he wasn't seeing any change on pricing, but this condition could change if the economy worsens.
Segment projections
A look at organic local-currency sales growth guidance for 2016 compared to year-to-date performance to the third quarter of 2015.
| Organic Sales Growth | Health Care | Safety & Graphics | Industrial | Electronics & Energy | Consumer |
|---|---|---|---|---|---|
| YTD to Q3 | 3.3% | 4% | 1.5% | (0.2%) | 3.5% |
| Guidance for 2016 | 3% to 5% | 1% to 3% | 0% to 3% | (2%) to 2% | 2% to 4% |
Data source: 3M company presentations.
In the presentation, Gangestad said Electronics & Energy would decline by high single digits in the fourth quarter, while Industrial and Safety & Graphics would both be down by low single digits. However, the midpoint of guidance for 2016 sees Electronics & Energy flat, with Industrial at 1.5% (same as YTD to the third quarter of 2015). Given their projected declines in the fourth quarter, the guidance for 2016 implies a turnaround in sales trends. Will it happen?
Where next?
Frankly, 3M's valuation still doesn't look cheap on a relative or a historical basis.
MMM EV to EBITDA (TTM) data by YCharts.
The 2015 guidance cut isn't what investors want to hear, and the company's projections for 2016 still imply a turnaround in organic growth trends. Taking a long-term perspective, the EPS guidance for 2016 doesn't overly rely on organic growth, and the company could see an easier trading environment in a year or so. However, investors will have to tolerate rising risk in the near term, and if the company misses estimates, the stock is likely to decline. On balance, the stock still doesn't look like a good value.
