3M Co (NYSE:MMM) investors certainly aren’t having fun, as shares fell 6.8% on Tuesday and sit just $9 above its 52-week low near $192. Ironically, 3M stock set that low on April 25, 2017. Only back then, shares of MMM stock weren’t in a total free-fall.
What’s got 3M down, anyway? The company missed earnings per share estimates by a penny, but did beat on revenue expectations. Given that shares had fallen about 17% from the highs coming into the report, 3M probably could have gotten away with the penny-per-share miss.
But, then management had to lower guidance.
When the stock market’s not in a good mood, missing earnings and coming up short on guidance — no matter how much the stock has already suffered — is a recipe for disaster. From the midpoint of management’s outlook, 3M now expects earnings per share of $10.37 vs. $10.45 in the prior outlook and organic sales growth of 3.5% rather than 4%.
Are they massive cutbacks? No. But, like I said, with today’s current environment, it’s not good to come up short.
Where to Now for 3M Stock?
The question investors now have to ask themselves is simple: Buy, sell or hold? It’s tough to hit the exits with shares down about 22% from the highs, as nobody wants to realize that kind of loss. Some may consider selling out of 3M and rolling into Honeywell International Inc. (NYSE:HON). They could log the loss for 3M and buy into HON without worrying about a wash sale and still stay long the industry — assuming they’re still bullish.
After all, Honeywell just beat on earnings per share and revenue results, while also boosting guidance, not cutting it like 3M.
If that’s not an option, the question becomes whether to buy or stay long 3M. Even the high end of management’s guidance ($10.55) barely comes in ahead of consensus estimates of $10.53 per share. Basing it off management’s outlook, 3M stock trades at more than 19 times this year’s earnings.
For that valuation, we get 13% earnings growth this year and less than 10% next year (although this figure may not be that accurate, now). On the revenue front, analysts expect about 6.5% growth this year.
Honeywell has about the same growth profile: 12.7% earnings growth this year and ~10% next year, along with revenue growth of 6% and 4% in 2018 and 2019, respectively. Shares trade at just over 18 times this year’s earnings.
For a slightly lower valuation, we’re essentially getting the same growth. Although, HON’s 2% dividend is lower than 3M’s 2.5% payout. Am I saying that 3M is a horrendous company? Absolutely not. It’s a high quality company just like HON. But, one company has some mojo (albeit not a ton) and the other has none.
Trading MMM Stock
While it’s been an ugly slide for 3M stock, the bulls actually have one notable opportunity.
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MMM stock is only slightly oversold at this point, with a relative strength index (RSI) of 27. Below 30 is technically an oversold position, but this reading can easily slip to the low-20s, if not even lower. That could time up with the hopefully strong layer of support sitting just below current levels.
Highlighted by a blue rectangle, the $190-$195 area should act as support for MMM stock. If it doesn’t hold as support, it’s honestly hard to say where 3M will end up. It’s already below all three major moving averages and sitting on hefty losses. Daring bulls or those who love the fundamental story can take a stab near the traced out area above.
For reference, here’s an updated HON chart from a few weeks ago:
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Notably, JPMorgan analyst Stephen Tusa remains negative on MMM stock. For the record, this guy has absolutely nailed the decline in General Electric Company (NYSE:GE) and on January 18, downgraded 3M to a sell. Eight days later, MMM hit its 52-week high and hasn’t looked back since. Tusa argues that the second half of 2018 won’t get much better in terms of growth for 3M.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
