What's In The Cards For 3M Company (MMM) In Q2 Earnings?

Industrial goods manufacturer 3M Company (NYSE:MMM) is scheduled to report second-quarter 2016 results before the opening bell on Jul 26. In the last reported quarter, 3M’s earnings beat the Zacks Consensus Estimate by 13 cents. In the trailing four quarters, the company has beaten earnings estimates all four times with an average positive earnings surprise of 5.35%.

Let’s see how things are shaping up for this announcement.

Key Factors in the Second Quarter

3M remains focused on portfolio management, investment in innovation and business transformation to gain a competitive advantage in the industry. 3M also intends to continue investing in research and development (R&D) to support organic growth. The company's global footprint, diversified product portfolio and ability to penetrate into different markets should boost its financials.

During the quarter, the company launched its 3M ScaleGard Blend Series of Products. These state-of-the-art products enable flawless operation of expensive equipment by intelligently calculating water filter usage to provide Recipe Quality Water. With such smart and innovative products, 3M strives to make its customers’ lives easier. The company also recently launched its SGLP-CL Series of Reverse Osmosis Systems which is used in combi-ovens and boilerless steamers. This system reduces harsh minerals that can build up in steam equipment, while minimizing maintenance and replacement costs, and saving customers an estimated $300 per year on an average.

The company also announced that its StrongArm Technologies ErgoSkeleton personal performance equipment is available for purchase through its distribution channel across the U.S. By joining forces with leading safety protection provider StrongArm Technologies, 3M is well positioned to bolster its portfolio in the industrial ergonomic safety equipment industry. New product launches and strategic tie-ups will likely boost the company’s top line going forward.

3M has initiated some prudent steps to strengthen and focus on its core portfolio of businesses. Since 2012, the company has pruned its businesses from 40 to 26, thereby improving customer relevance, productivity and speed through a leaner operating structure. At the same time, 3M has maintained a steady investment in R&D to develop innovative products. The company expects to invest $1.8 billion in R&D in 2016 for higher organic growth and complement it through strategic acquisitions. It believes that these efforts will result in significant annual operational savings and reduction in working capital.

However, the U.K. serves as one of the largest markets for 3M outside the U.S. with 2,600 employees across 20 locations including 9 manufacturing sites. In 2015, the company recorded 20.5% or $6,228 million from Europe, the Middle East & Africa, a significant amount of which was generated in the U.K. The products that are manufactured in the country includes coated abrasives, personal safety equipment, adhesive tapes, industrial microbiology products, drug delivery systems, high performance coatings and imaging systems. With a prominent exposure and presence in the U.K., the company remains vulnerable to risks related to Brexit.

Given its international presence, adverse foreign currency translations are likely to affect the company’s ability to realize projected growth rates in its sales and earnings. Fluctuations in foreign currency exchange rates affect the company’s net investment in foreign subsidiaries and may cause instability in cash flows related to foreign denominated transactions. These undermine its long-term growth potential to some extent.

Earnings Whispers

Our proven model does not conclusively show that 3M is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at -0.48%.

Zacks Rank: 3M’s Zacks Rank #3 when combined with a negative ESP makes surprise prediction uncertain.

We caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

AK Steel Holding Corporation (NYSE:AKS) , earnings ESP of +100% and a Zacks Rank #2.

LG Display Co., Ltd. (NYSE:LPL) , earnings ESP of +50% and a Zacks Rank #2.

Owens Corning (NYSE:OC) , earnings ESP of +9.41% and a Zacks Rank #1.