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Stock Analyst Update

Disappointing Results for Wide-Moat 3M

Our long-term fundamental outlook for the firm remains intact, and we don't expect changes to our fair value estimate.

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Wide moat-rated  3M (MMM) reported disappointing results for the 2018 third quarter, but this does not alter our long-term fundamental outlook for the firm. As a result, we don’t expect a material change to our $193 fair value estimate. The firm improved third-quarter organic sales by 1.3% year over year (down 0.2% year over year on a reported basis) on a tough comp from last year's third quarter, which rose 7% year over year. Sales also had a tough sequential comp with last quarter’s enterprise resource planning system, which saw sales front loaded based on customer anticipation of the roll out. That said, 3M’s third quarter free cash flow rose 24% year over year, and free cash flow conversion was an impressive 114%. This allowed 3M to return $794 million to shareholders in the form of dividends, as well as $1.1 billion in the form of share repurchases.

Looking closely at its operating segments, 3M's performance was a bit of a tale of two cities. Our thesis largely depends on how 3M's overall portfolio is managed, and we expect both safety and graphics and healthcare to deliver most of the portfolio's growth. Safety and graphics was once again a bright spot for the firm. Organic sales only grew 2.2% year over year, but the acquisition of Scott Safety has been a strong growth engine and has exceeded management’s expectations, boosting reported sales 7% year over year, even with a negative 2.2% year-over-year headwind. 

Healthcare, however, had some adverse headwinds and revenue decreased 1.1% year over year. Healthcare has been running below management’s 4%-6% sales growth target for the segment. We're not overly concerned with some of the near-term weakness in the healthcare segment. Most of the weakness here can be attributed to the firm’s drug delivery business, as well as a tough comp from last year (which rose 7.6% year over year).

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Joshua Aguilar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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