Will Top-Line Growth Augment 3M's (MMM) Earnings In Q4?

Diversified industrial goods manufacturer 3M Company (NYSE:MMM) is scheduled to report fourth-quarter 2017 results before the opening bell on Jan 25. A favorable macroeconomic environment is likely to boost the revenues for the company in the quarter.

Whether this can translate into bottom-line growth remains to be seen.

Top-Line Expansion

With primary focus on organic growth, 3M has continually invested in infrastructure and commercialization capability. Moreover, substantial investments in R&D coupled with the ability to convert such high R&D spends into up-cycle market share gains and strong pricing powers determine the company’s success.

In October 2017, the company decided to divest its Communication Markets business for $900 million in order to focus on its core businesses. Since 2012, 3M has done significant portfolio restructuring — divesting assets that no longer fit in its strategy and making newer investments in more lucrative markets. The objective of this endeavor is to improve customer relevance and productivity through a leaner operating structure.

Such concerted efforts by the company to augment its leading position in the market are expected to favorably impact its revenues in the quarter.

The Zacks Consensus Estimate for 3M’s fourth-quarter revenues is $7,878 million, significantly higher than reported revenues of $7,329 million in the prior-year quarter. Higher revenues are expected across all the segments of the company. The Industrial segment, which had grossed more than 33% of the company’s revenues in the third quarter of 2017, is expected to generate $2,682 million, higher than the reported figure of $2,524 million of the prior-year quarter.

Safety and Graphics, Electronics and Energy, Health Care and Consumer segments are expected to generate revenues of $1,455 million, $1,260 million, $1,488 million and $1,135 million, respectively, up from $1,301 million, $1,208 million, $1,379 million and $1,094 million reported in the prior-year quarter.

Other Key Factors

At present, the company is focused on three key levers namely, portfolio management, investment in innovation and business transformation. For portfolio management, 3M intends to concentrate on its most profit-making and fastest-growing businesses. To this effect, the company has taken steps to prune its businesses from 40 to 24. In 2018, 3M plans to increase investments in research and development to $1.9 billion or about 6% of sales for continued focus on the second lever. The third lever is enabling the company to better serve customers with even more agility and efficiency.

Moreover, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500-$700 million in annual operational savings by 2020, and an additional $500 million through reduction in working capital requirements.

Our proven model conclusively shows that 3M is likely to beat earnings this quarter as it possesses 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 perfectly 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 +1.72% as the former is pegged at $2.07 and the latter at $2.03. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: 3M has a Zacks Rank #2. This increases the predictive power of ESP and makes us reasonably confident of an earnings beat.

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

Other Stocks to Consider

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

Apple Inc. (NASDAQ:AAPL) has an Earnings ESP of +1.12% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

AmerisourceBergen Corporation (NYSE:ABC) has an Earnings ESP of +1.50% and a Zacks Rank #2.

American Financial Group, Inc. (NYSE:AFG) has an Earnings ESP of +1.21% and a Zacks Rank #2.

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