Shares of industrial conglomerate 3M (MMM) are getting slammed this morning after the company issued 1Q19 results that came in far below expectations, while slashing its FY19 guidance. As a Dow component, its surprisingly weak results are knocking the DJIA average lower and these results are a reason why we are seeing the divergence in performance between that index and the Nasdaq.
For the quarter, MMM posted EPS of $2.23 (-11% yr/yr) vs. the $2.50 consensus with revenue falling by 5% to $7.86 bln, also badly missing the $8.02 bln expectation. Additionally, MMM drastically cut its FY19 guidance, seeing EPS of $9.25-$9.75 vs. its prior outlook of $10.45-$10.90, and organic local-currency sales growth in the range of -1 to +2% vs. its prior range of +1-4%.
Click here to access the earnings press release.
For the most part, companies have been reporting better-than-expected earnings so far this earnings season, which has helped push the markets to new all-time highs. The upside reports have helped ease investors' minds that a global economic slowdown could hit another gear.
MMM's Q1 report is raining on that parade as the company stated that it is facing slowing conditions across its end markets, with particular weakness in China. What's especially discouraging is that the softness wasn't limited to just one segment. Rather, the weakness was broad-based.
In its largest segment, Industrial Products (37% of revs), which include adhesives, tapes, and abrasives, organic local current sales slid by 2.8% yr/yr. That represents a sharp downturn from last quarter when sales were up nearly 3% as it experienced growth in every geographic market.
In its earnings press release, MMM noted that industrial sales declined in the automotive aftermarket. It's been widely reported for some time now that the auto market has been weakening in China, including a 5% drop in auto sales in March. Additionally, the company stated that total revenue declined by 3.6% in APAC on a local currency basis, making it the worst performing region.
So, we can deduce that one significant headwind facing MMM is the sluggish automotive market, especially in China.
The Health Care segment (19% of revenue) also experienced a meaningful slowdown with revenue up less than a percent compared to Q4's 5% growth. The performance of this segment can be a little more volatile because it is partially dependent upon pharmaceutical regulatory timelines and approvals. For instance, in Q3, sales dipped by 1.1% as it suffered from weakness in its drug delivery business.
Timing issues seem to be the problem again this quarter as MMM again cited a decline in its drug delivery business as a reason for the underperformance in this group.
As a result of the challenging conditions facing the business as a whole, MMM is undertaking a major restructuring program to streamline the business, remove costs, and improve cash flow. Specifically, this includes the realignment from five to four business groups and the reduction of 2,000 jobs worldwide. These actions will span all business groups, functions, and geographies, with an emphasis on corporate structure and underperforming areas.
If there wasn't enough already on its plate, the company is also dealing with litigation issues. MMM is a defendant in an environment lawsuit regarding the manufacturing and disposal of PFAS-containing waste. As a result, it has established a reserve of $548 mln to resolve the environmental matters and for legal expenses. Accordingly, the company took a massive pre-tax charge this quarter.
Key Takeaways: The Q1 earnings season was progressing quite well, but MMM's surprisingly weak report has thrown some cold water on it, reminding investors that risks in the global economy remain. There are some company-specific issues at play, including litigation and some negative regulatory timing effects in the Health Care segment. However, as a diversified industrial company with operations around the globe, MMM's poor results do provide a window into the health of the global economy. The fact that the soft results cut across all its segments is also telling.
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