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3M (MMM) Up 4.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for 3M (MMM). Shares have added about 4.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is 3M due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

3M’s Q3 Earnings Beat, Revenues Miss

3M’s third-quarter 2022 adjusted earnings (excluding $4.08 from non-recurring items) of $2.69 per share surpassed the Zacks Consensus Estimate of $2.61. The bottom line increased year over year.

3M’s net sales of $8,619 million missed the Zacks Consensus Estimate of $8,698.8 million and declined approximately 4% year over year due to 1% negative impact from divestitures and 5% from foreign currency translation due to a stronger U.S. dollar. Organic sales increased 2% year over year despite a 1.4 percentage point impact from the decline in disposable respirator demand.

Region-wise, sales in the Americas increased 1.1% year over year, while that in the Asia Pacific declined 6%. Sales from business in the Europe, Middle East and Africa region declined 13.4%.

Segmental Results

The company reports top-line results under four business segments — Safety & Industrial, Transportation & Electronics, Health Care and Consumer.

Revenues from Safety and Industrial totaled $2,894 million, decreasing 3.7% year over year. The decline was attributable to a 5.4% negative impact from movements in foreign currencies, partially offset by a 1.7% increase in organic sales.

Revenues from Transportation & Electronics totaled $2,239 million, reflecting a year-over-year decrease of 3.8%. The decline was attributable to 6% adverse impact from movements in foreign currencies, partially offset by 3% increase in organic sales.

Revenues from Health Care were $2,076 million, down 4.5% year over year. The results benefited from a positive impact of 1.7% from organic sales, partially offset by a 4.8% negative impact from movements in foreign currencies.

Revenues from Consumer dipped 1.7% year over year to $1,409 million. Organic sales increased 1.5%. Movements in foreign currencies had a negative impact of 3.2%.

Margin Profile

In the quarter under review, 3M’s cost of sales decreased 2.6% year over year to $4,728 million. Selling, general and administrative expenses climbed 9.8% to $1,998 million. Research, development and related expenses declined 4.4% to $461 million.

The company’s adjusted operating income in the quarter dipped 1.6% year over year to $1,855 million. Adjusted operating margin was 21.5% compared with 21.1% in the year-ago quarter. The adjusted tax rate in the quarter was 16.2% compared with 18.5% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter, 3M had cash and cash equivalents of $3,404 million compared with $4,564 million at the end of December 2021. Long-term debt was $13,849 million at the end of the third quarter compared with $16,056 million at the end of December 2021.

In the first nine months of 2022, the company generated net cash of $3,669 million from its operating activities, reflecting a decrease of 32.7% from the year-ago quarter. Capital used for purchasing property, plant and equipment increased 18.7% to $1,243 million at the end of the first nine months of 2022.

Adjusted free cash flow at the end of the third quarter was $3,040 million, down 35.2% year over year. Adjusted free cash flow conversion was 68% at the end of the same period.

In the first nine months of 2022, 3M rewarded its shareholders with dividend payments of $2,550 million, down roughly 1% year over year.

2022 Outlook Lowered

3M has reduced its full-year forecast due to the strengthening of the U.S. dollar and the uncertainty surrounding the economy. The company now expects sales to decline 3-3.5% year over year in 2022 compared with the prior prediction of a decrease of 0.5-2.5%.

The company expects organic sales growth of 1.5-2% in the year compared with 1.5-3.5% expected earlier. Divestitures are expected to hurt sales by 0.5% now (previously- no impact was estimated). Foreign currency translation is expected to impact sales by 4.5% in 2022 compared with 4% anticipated earlier.

3M expects adjusted earnings of $10.10-$10.35 for 2022 compared with $10.30-$10.80 estimated earlier. Operating cash flow is expected to be $6.8-$7.4 billion, which is equivalent to an adjusted free cash flow conversion of 85-95%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -7.52% due to these changes.

VGM Scores

At this time, 3M has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 3M has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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