Shares of 3M Co. (MMM) endured double-digit losses during the Thursday session after the multinational manufacturing giant missed big on Q1 earnings estimates. Earlier in the session, the stock was on track to be the biggest loser on the S&P 500 as well as on track to suffer its largest single-day loss in more than three decades.
The company’s disappointing financials contrast the upbeat narrative around the U.S. industrial sector, which has been on a tear in 2019 thanks to firms like Honeywell International Inc. (HON) and Fastenal Co. (FAST) rallying more than 28% and reporting strong earnings. With 3M being a classic bellwether, investors want to know if the poor Q1 earnings indicate stormy conditions ahead for the industrial economy.
Here’s a closer look at 3M’s earnings report – and what it means for the company and industrials moving forward…
The News
The company missed estimates on both the top and bottom line as well as significantly lowered its full-year 2019 forecast by more than $1.
3M reported earnings per share (EPS) of $2.23, declining 10.8% year-over-year from $2.50 in Q1 2018 and missing Wall Street’s $2.49 forecast by 10.4%. The company raked in $7.86 billion in revenue during the January-March period, which fell more than 5% from $8.3 billion a year ago and fell 2.1% short of analysts’ $8.03 billion estimate. The biggest factor that dragged those numbers down was a litigation-related charge of $548 million, or $0.72 per share, that ate the company’s balance sheet during the first quarter of the year. As for the 2019 forecast, 3M revised its full-year EPS range down from between $10.45 and $10.90 to between $9.25 and $9.75.
CEO Mike Roman elaborated on the disappointing quarter as a period in which the firm “continued to face slowing conditions in key end markets which impacted both organic growth and margins” but noted that 3M is taking measures to “drive productivity, reduce costs, and increase cash flow as we manage through challenges in some of our end markets.”
How Investors Reacted
By midday on Thursday, shares of MMM were down 11% from $219.08 at Wednesday’s close to $195. That put the stock on track for its worst daily performance since Black Monday on Oct. 19, 1987, the day that the Dow Jones Industrial Average catastrophically lost 22.6%. Despite the massive losses, MMM stock is still up 15% on the year from the Dec. 31 close of $190.54.
The Bigger Picture
As with other industrial firms like Fastenal that recently reported earnings, 3M didn’t shy away from noting how slowing economic growth is a primary concern for the firm moving forward, a fact that surely instigated many of the firm’s newly announced cost-cutting measures.
There’s been no shortage of warnings about global growth in 2019. The International Monetary Fund (IMF) in particular noted earlier this month how the global economy sits in “a delicate moment” marked by several factors, including, but not limited to, U.S.-China trade tensions and disruptions to Germany’s car market. This invariably led to the 4.3% year-over-year drop in 3M’s China revenue and 9% decline in the company’s global auto business.
That’s why 3M on Thursday announced intentions to restructure its business and slash 2,000 jobs, or roughly 2% of its entire workforce, resulting in pretax savings as high as $250 million. Those positions primarily encompass corporate operations and business lines that have been underperforming, particularly the firm’s auto, energy, and electronics divisions. The auto business will likely endure the heaviest job cuts, as the firm attempts to reverse nine straight months of declining auto sales in China, one of the world’s biggest car markets.
Analysts were quick to point out just how mismanaged 3M’s auto sector has been. Bank of America Merrill Lynch’s Andrew Obin said the firm has consistently proven an “inability to execute on their internal supply chain, to react well to what’s happening in China and Japan.”
Looking Ahead
3M isn’t the only industrial company reeling from a global economic slowdown, but it’s definitely one of the most visible. Its enormous exposure to Asian markets constantly puts in front and center whenever talk of ratcheting trade tensions or lagging Chinese growth hits the airwaves.
That being said, some banks say the company is currently undervalued, with JPMorgan noting that 3M’s businesses are worth about 6% below the current value of the stock. With MMM near 2019 lows, value investors may consider it a strong buy but should be wary of how easily global economic influences can make or break the firm’s share price.
