3M shares drop sharply after Q3 profit misses expectations

3M Co. missed Wall Street expectations for the third quarter and lowered its 2018 forecast Tuesday, sending its stock — and the Dow Jones industrial index with it — on a roller-coaster ride.

By the end of the day, 3M shares had recovered most of their losses. The Dow ended at 25,191.43, down another 125 points, also affected by poor Caterpillar results and Asian pressures.

3M had a "generally disappointing" quarter, said analyst Matt Arnold with Edward Jones, which maintained a "hold" rating on the stock.

The results marked a rough debut for Mike Roman, who succeeded Inge Thulin as chief executive of the diversified manufacturer on July 1.

3M attributed much of the quarter's difficulty to unfavorable currency foreign-exchange rates, rising raw-material costs, sluggish demand in Europe and lost revenue from the sale of a large communication products business.

During Tuesday's conference call, Roman and Nick Gangestad, chief financial officer, also said the effect of trade tariffs, and what is expected to be slower growth in China, also affected the quarter.

Gangestad said that future trade "tariff headwinds" are expected to escalate 3M's costs by about $100 million in 2019. However, 3M is working with suppliers and increasing its own product pricing accordingly. Those pricing actions should "more than offset" the hit in 2019, he said.

But 3M lowered its profit forecast for full-year 2018 to a range of $8.78 to $8.93 per share. Previously, it expected full-year profit to be in the range of $9.08 to $9.38 per share.

Revenue for the company — one of only two Minnesota firms figured in the Dow average — fell 0.2 percent to $8.2 billion. That was below the consensus analysts' forecast of $8.39 billion.

The Maplewood maker of Scotch tape, automotive coatings and health care products, saw profits rise 8 percent to $1.54 billion, or $2.58 per share. Analysts were expecting a profit of $2.70 a share.

CFRA Research also downgraded 3M's stock to a hold. "Given slowing revenues and operating margin compression, at a time when global growth is threatened by tariffs and uncertainly, we can no longer justify a 'buy' recommendation on the shares," CFRA's Jim Corridore said.

Arnold said 3M's organic growth "was also disappointing in the context of healthy global economic growth." However, he said Edward Jones still has confidence in 3M's "appropriate investments in innovative products."

David Berge, Moody's senior vice president, said while he appreciated 3M's "strong" margins, credit profile and free cash flow, he worried that "operating results such as 3M's may portend a trend toward more modest earnings growth among diversified industrials, signaling that earnings growth has peaked in this sector."

While the stock recovered to close at $192.58, down 4.4 percent, it is far from its January high of $259.77 a share.

Three of 3M's five businesses saw sales declines during the quarter ended Sept. 30. Its Safety and Graphics business was the only one to report performance gains in both sales and profits.

Excluding several one-time items, such as the gain from the communication business divestiture, 3M's first-quarter legal settlement with the state of Minnesota over pollution clean up costs, and tax-cut expenses, adjusted 2018 earnings should be $9.90 to $10 per share. That's lower than the prior forecast of $10.20 to $10.45 per share.

Roman said 3M would continue to look at its portfolio of businesses and make adjustments as needed. "Going forward, we are focused on driving growth, being relentless and putting our customers first and continuing to transform 3M to deliver greater productivity," he said. "This means we will continue to work to optimize our portfolio, prioritizing resources to our most attractive opportunities."

He also said the company would continue to invest in "high growth" areas such as automotive electrification, advanced wound care and data centers.

In the past few years, 3M has aggressively pursued "business transformation," including a $2 billion purchase of Scott Safety and several divestitures including the $870 million sale of its communication markets business to Corning.

While the company's research and development spending slid to 5.3 percent of sales during the quarter, Roman said the company still maintains its goal of spending 6 percent annually on research and development. "R&D is still a priority for us," Roman said.

As far as sales growth, analysts said 3M was unusual because it followed nearly a year of strong growth from most of its five businesses, instead of just the Safety and Graphics business, which grew 7 percent to $1.7 billion for the quarter.

Sales of 3M's largest business, Industrial, were flat at $3 billion, while operating profits slipped 0.7 percent amid weaker demand in West Europe and weaker demand for auto collision repair products and other aftermarket automotive items.

Melius Research analyst Scott Davis questioned what happened to 3M's health care unit, once highlighted for its growth potential internationally. Total health care sales slid 2.8 percent to $1.4 billion during the quarter. "I just don't recall the type of volatility you had in the health care business," he said.

Roman noted the unit had an issue with 3M's drug delivery product unit, based in part on its pharmaceutical partners' regulatory timelines. Beyond that one problem, health care "is delivering expectations," he said.

Consumer sales fell 3.4 percent to $1.2 billion during the quarter, partly as a result of the difficult retail-store environment, a U.S. computer system installation woes and slower demand in Asia and Europe.

3M's Electronics & Energy business fell 4.8 percent to $1.4 billion following the divestiture of its Communication Markets Division. Analysts were pleased to note that the once heavily troubled Electronics business actually posted strong profit-margin growth during the quarter.

Roman and Gangestad said that a lot of work has gone into turning around the Electronics and Energy business over the last few years and that solid profit gains are now expected for that division.

Dee DePass • 612-673-7725