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Why Is 3M (MMM) Down 5.8% Since Last Earnings Report?

It has been about a month since the last earnings report for 3M (MMM). Shares have lost about 5.8% in that time frame, underperforming the S&P 500.

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

3M’s Q1 Earnings & Reveneus Beat Estimates

3M Company’s first-quarter 2023 adjusted earnings (excluding 21 cents from non-recurring items) of $1.97 per share surpassed the Zacks Consensus Estimate of $1.60. The bottom line declined in double digits year over year due to the exit of the company’s Russia operations and a 3.4 percentage point headwind from the decline in disposable respirator demand.

3M’s net sales of $8,031 million outperformed the Zacks Consensus Estimate of $7,635 million. However, the top line declined 9% year over year due to an adverse foreign currency impact of 2.8% and a 1.3% negative impact from divestitures. Organic sales fell 4.9%.

Region-wise, sales in the Americas decreased 0.9% year over year, while that in the Asia Pacific declined 21.3%. Sales from business in Europe, the Middle East and Africa declined 10.4%.

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 $2,779 million, decreasing 8.9% year over year. The decline was attributable to a 2.9% negative impact from movements in foreign currencies. Organic sales declined 6% in the segment.

Revenues from Transportation & Electronics totaled $2,050 million, reflecting a year-over-year decrease of 12.4%. The decline is attributable to a 3.4% adverse impact from movements in foreign currencies. Organic sales declined 8%.

Revenues from Health Care were $2,010 million, down 5.6% year over year. The results were hurt by 2.7% impact from adverse foreign currency translation, partially offset by 1.4% organic sales growth.

Revenues from Consumer fell 9% year over year to $1,192 million. Organic sales decreased 6.8%. Movements in foreign currencies had a negative impact of 1.9%.

Margin Profile

In the quarter under review, 3M’s cost of sales decreased 4.4% year over year to $4,613 million. Selling, general and administrative expenses declined 9.4% to $1,705 million. Research, development and related expenses dipped 1.7% to $472 million.

The company’s adjusted operating income in the quarter dropped 26.6% year over year to $1,376 million. The adjusted operating margin was 17.9% compared with 22% in the year-ago quarter. The adjusted tax rate in the quarter was 17.7% compared with 17.5% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the first quarter, 3M had cash and cash equivalents of $3,824 million compared with $3,655 million at the end of December 2022. Long-term debt was $12,948 million at the end of the first quarter compared with $14,001 million at the end of December 2022.

In the first quarter, 3M generated net cash of $1,275 million from its operating activities, reflecting an increase of 26.1% from the year-ago quarter. Capital used for purchasing property, plant and equipment increased 12% to $475 million in the first quarter.

Adjusted free cash flow at the end of the first quarter was $946 million, up 24% year over year. Adjusted free cash flow conversion was 87% at the end of the same period.

In the first quarter, 3M rewarded its shareholders with dividend payments of $827 million, down 2.9% year over year. The company bought back shares worth $29 million in the same period.

2023 Outlook Intact

3M has reiterated its 2023 guidance. The company continues to expect adjusted total sales to decline 2-6% year over year. Adjusted organic sales are anticipated to decline up to 3% year over year or remain flat.

3M estimated adjusted earnings of $8.50-$9.00 per share for 2023. The mid-point of the guided range — $8.75 — lies above the Zacks Consensus Estimate of $8.63.

Adjusted operating cash flow is expected to be $5.8-$6.3 billion for the current year. Adjusted free cash flow conversion is predicted to be 90-100%.

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How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted -18.6% due to these changes.

VGM Scores

At this time, 3M has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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