Seeing 3M
But, of course, 3M today committed the unforgivable sin of "failing to meet expectations." (I'm pretty sure that "Thou shalt not ever miss thine guidance nohow, for doing so giveth Wall Street hives" was one of the commandments on that third tablet that Mel Brooks' Moses dropped during History of the World.)
The problem was that 3M said it would meet the range of its with-items earnings guidance ($1.14 to $1.17 a share) but miss the ex-items tally. Tax benefits would offset some softness in the optical film portion of the display graphics business, and there's the rub.
Optical film -- used in stuff like TV, computer, and cell-phone displays -- is one of the superstars at 3M, a glamour-growth segment, because it relates to nifty, fast-selling products like computer displays and LCD TVs. Read the past couple of conference-call transcripts, and you'll see how the analysts obsess about it. That, I think, is why this miss is spooking the Street.
But I think it's overdone. I'm not much on management excuses, but 3M's always sound so darn good. (No weather or gas prices, so there's a start.) As inventory seems to have piled up, 3M says, manufacturers have laid off the production, meaning they need less of the film. Moreover, startup costs on new manufacturing capacity have drained more money from the segment just as the top of the funnel was slower to fill.
But it's important to put it all in perspective. Last quarter, the entire display and graphics segment represented about 16% of revenues. A decent chunk, yes, but not the whole enchilada. Moreover, a look back at the annuals shows this business to have a history of lumpiness, and it's not always possible to predict when or where the lumps will come.
This quarter, 3M says the shortfall is owed to slower-than-expected computer and TV sales, some of it because those cheap Europeans didn't buy enough flat-screen TVs to watch the World Cup.
It sounds both odd and reasonable to me, especially the computer bit. If you've been watching tech at all recently, you will have noticed bummer sales and profit predictions among many of the mainstays in the computer biz. Graphics chipmakers such as ATI Technologies
It looks as though we're at one of those periodic tech spending lulls, partially because of unease about the economy, but also, in my opinion, because of the lateness of a certain well-known operating system -- it rhymes with "shin hose" -- which seems to have put a damper on the entire industry.
But I'm pretty certain this will pass and the optical-film business will rebound. Not only should 3M's new capacity -- if it's done right -- give it cost advantages going forward, but also the future of displays looks all flat-panel to me. Apple, for instance, is giving up on cathode-ray tube Macs for good.
In summary, I say we're looking at a minor problem that's likely to be solved within months. So, as an investor, you can approach this sort of situation in a few ways:
A. Join the frenzied sellers.
B. Decry the paint-taping market makers and evil hedge funds who are, no doubt, trying to push down your good stock.
C. Realize that this kind of idiotic market overreaction is natural, just part of the crazy game, and take the bargains when they come.
The right answer (and I made the quiz, so I know the answer) is C. Not only should you be nonchalant about such overreactions, but you should also be grateful when they come.
So ... it's past noon on Friday. Get yourself a few shares of 3M, sit back, and toast Mr. Market with a cold one. He doesn't offer you a 7%-off sale on prime goods every day.
Dell, 3M, and Intel are Motley Fool Inside Value recommendations. But we know a ticker is not an investment thesis, which is why you can get the reasoning behind the recommendation with a free trial.
Seth Jayson would like some more 3M at, say, $65 a share. So bring it on. At the time of publication, he had shares of 3M but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
