3M (MMM) Marginally Beats Q3 Earnings, Trims 2016 Guidance

Despite a challenging macroeconomic environment, 3M Company (NYSE:MMM) reported relatively healthy third-quarter 2016 results with GAAP earnings of $1,329 million or $2.15 per share compared with $1,296 million or $2.05 per share in the year-earlier quarter. The year-over-year improvement in earnings per share, despite slightly lower sales, was largely due to a decline in operating expenses. The reported earnings exceeded the Zacks Consensus Estimate by a penny.

Net sales during the quarter were $7,709 million, marginally down from $7,712 million in the year-ago quarter and in line with the Zacks Consensus Estimate. Foreign currency translation impact increased sales by 0.5%, while organic local-currency sales declined 0.8% and inorganic growth added 0.3%.

On a geographic basis, organic sales increased 1.2% in Latin America/Canada, offset by a 2.2% decline in Asia Pacific, 1% decline in EMEA (Europe, Middle East and Africa) and 0.4% in the U.S. Operating income in the reported quarter was $1,904 million versus $1,876 million in the year-ago-quarter, resulting in respective operating margins of 24.7% and 24.3%.

Segment Results

Industrial segment sales increased 1% year over year to $2,582 million as sales growth in automotive OEM and automotive aftermarket was partially offset by decline across the rest of the portfolio. Operating income increased 2% year over year to $591 million, while operating margin improved 0.3% to 22.9%.

Health Care segment sales increased 1.1% to $1,361 million in the reported quarter, driven by growth in food safety, drug delivery systems, and critical and chronic care. Organic local-currency sales increased 1.5% year over year while adverse foreign currency translation partially reduced segment sales by 0.4%. Operating income decreased 0.6% year over year to $429 million, while operating margin was also down 0.6% to 31.5%.

Consumer segment revenues were $1,209 million, up 4% year over year, driven by home improvement and home care businesses. Operating income was $317 million, up 8.3% year over year. Operating margin was 26.2% for the reported quarter compared to 25.2% in the year-ago quarter.

Safety and Graphics segment sales increased 2.2% year over year to $1,448 million, owing to sales growth in roofing granules and commercial solutions. The segment recorded organic local-currency sales growth of 2%. Operating income increased 12.3% to $364 million, while operating margin improved 2.2% to 25.1%.

Electronics and Energy segment revenues were $1,293 million, down 7.5% year over year due to decline in electronics material solutions and display materials and systems. Organic local-currency sales declined 8.1%, dragged down by weakness in electrical markets and renewable energy markets. Operating income was down 9.1% year over year to $312 million, while operating margin was down 0.4% to 24.2%.

Balance Sheet and Cash Flow

Cash and cash equivalents as of Sep 30, 2016 were $2,308 million, compared with $1,605 million as of Sep 30, 2015. Long-term debt stood at $11,079 million at quarter end, compared with $8,937 million in the year-ago period. Cash flow from operating activities for the first nine months of the year was $4,453 million compared with $4,082 million in the year-earlier period. Free cash flow generated during the quarter was $1,561 million, up from $1,310 million in the prior-year period.

During the reported quarter, 3M paid $670 million in cash dividends and repurchased $774 million worth of shares. 3M converted 117% of net income to free cash flow during the quarter.

Outlook Narrowed

3M narrowed its earlier guidance for 2016. The company anticipates 2016 GAAP earnings in the range of $8.15 to $8.20 per share compared to earlier projections of $8.15 to $8.30. Organic local-currency sales is expected to be flat compared to 0%-1% growth expected earlier, while free cash flow conversion rate is anticipated to be 95%-105%.

With continued restructuring activities for a focused portfolio, 3M expects to report relatively healthy results in 2016 and beyond. 3M currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Danaher Corp. (NYSE:DHR) , Leucadia National Corporation (NYSE:LUK) and Macquarie Infrastructure Corporation (NYSE:MIC) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danaher has a long-term earnings growth expectation of 11.7% and is currently trading at a forward P/E of 22.4x.

Leucadia has a long-term earnings growth expectation of 18.0% and is currently trading at a forward P/E of 94.2x.

Macquarie is currently trading at a forward P/E of 70.1x.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>