Founded two years into the start of the last century, 3M Co (MMM) is the epitome of a long-term investment.
Synonymous with the adhesive Post-it notes — a product that fortuitously came to fruition by the hands of two 3M scientists — many people may not know that the innovation firm originally started out as a mining venture called Minnesota Mining & Manufacturing.
After a devastatingly quick failure, 3M was forced to pivot, which led to far more favorable results. And as the company enters a new era, it will need to once again reinvent itself.
Although known for its overall growth and stability, MMM came under rare fire in the markets early this year. Troubles began on April 23, when MMM fell short of Wall Street’s consensus for its first quarter.
Coincidentally, 3M stock missed its Q1 target for both FY2014 and FY2013. On this go-around, investors were quick to punish management’s downward guidance on profitability for the year, driving down MMM 3% against the prior session.
The reason for the shortfall was blamed squarely on the strength of the dollar relative to foreign currencies. The sudden paradigm shift in the greenback negatively impacted domestic corporations with significant international business interests. For 3M, the currency headwind — the U.S. Dollar Index jumped nearly 22% year-over-year on April 23 — was particularly painful as the company makes most of its sales abroad.
In fact, it was only until recently that MMM showed any signs of life in the markets. Following a peak-to-trough loss of more than 18% between March 2 and Sept. 24, 3M stock stormed back, nearly regaining those earlier setbacks with a move of 16%. On an adjusted basis, MMM is within sneezing distance of reaching parity year-to-date.
In its infrastructure as well, 3M has been forced to make uncomfortable concessions. Late last month on its earnings call for Q3, management announced its plans to reduce its workforce by about 1,500 jobs, or nearly 2% of its total payroll.
Despite exceeding by a nickel analysts’ per-share earnings target of $2, 3M’s revenue of $7.71 billion was 2% below expectations. The culprit was a strong dollar amidst the backdrop of global economic uncertainty.
Those looking for confidence within a broad financial context will likely be disappointed. As it stands, 3M’s trailing revenue is 3.5% below full-year results for FY2014.
On the one hand, top-line sales for each of the first three quarters within the current fiscal year fell an average of 4.65% YoY. Net income, on the other hand, is trending to exceed the prior year’s total, but only barely. Then there’s EPS growth, which although positive, has been disappointing. For example, in Q3 of last year, EPS jumped more than 11% YoY. This year, 3M’s per-share earnings wafted up a mere 3.5%.
At the current price point in the markets, MMM is roughly trading at 21 times trailing earnings, while its forward price-earnings ratio is closer to 19. Both figures are considered average for the industry — not a bad deal, but not necessarily a screaming buy, either.
The pensiveness is quite evident in the technical charts. Although the monthly average share price for 3M stock increased nearly 13% from September to November, average volume over the same time frame actually declined by 30%.
The divergence between price optimism and a shortage of buyers is emblematic of 3M’s current challenges. Its phenomenal success in the last century has afforded MMM an enviable safety margin to weather all manners of market volatility.
3M’s reliance on international sales, however, as well as shifting economic dynamics back home, means that the top brass must find effective (and timely) answers to a series of disappointing financial performances.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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