As a legacy stalwart, 3M (NYSE:MMM) almost appears destined to follow in the footsteps of other Dow Jones losers. Last year, MMM stock crumbled, shedding 17%. Even worse, 3M rarely looked competitive. This year seemed to hold some promise, with shares up nearly 16% in mid-April compared to the January opener. Then, the company released its first quarter of 2019 earnings results.
To say that 3M stock stunk up the markets would be an understatement. Prior to the disclosure, covering analysts pegged earnings per share at $2.49. Unfortunately for stakeholders, 3M delivered only $2.23. To make matters worse, this was a far cry from the EPS of $2.50 from the year-ago quarter.
Neither did MMM stock recover in the revenue front. The underlying company reported $7.86 million in sales, down significantly from the $8.02 billion consensus target. Again pouring salt on open, festering wounds, 3M rang up $8.28 billion in Q1 2018.
With such terrible print, the only saving grace for 3M stock would have been the forward guidance. But even here, management disappointed. They’re now expecting full-year EPS to hit between $9.25 to $9.75. That’s a sharp drop from the previous guidance of $10.45 to $10.90.
No matter how you look at it, this is a risky story. Still, if you’re willing to look at the nuances, MMM stock offers some substance to the contrarian trade.
Acelity Takeover a Bright Spot for MMM Stock
With 3M stock falling and debt levels rising, the last thing you want to see is management spending large for acquisitions. However, that’s exactly what happened a few days ago when 3M bought out Acelity for approximately $6.7 billion. For context, that’s the biggest deal in the company’s history.
More than one analyst has questioned the viability of this move. However, I don’t view it as such a bad gig. For starters, the Q1 report revealed that every division within 3M’s ranks were duds, except for one: healthcare. Mind you, it wasn’t great growth, but it was growth nevertheless.
While I’m concerned about the spend — who isn’t? — at least management is investing in proven winners. Acelity bolsters 3M’s already strong presence in wound-care. This buyout alone could make things interesting from a sales-growth perspective.
Secondly, healthcare is a diverse market. Some segments are straight-up risky, especially if we have a transition in power in 2020. Other segments, like wound-care, offer an almost-guaranteed path to profitability.
For example, experts believe that the North American wound-care market will grow at a compound annual growth rate of over 7% till 2024. In addition, specific wound-care segments, such as chronic and surgical wounds, offer potentially lucrative revenue channels.
Like I said, it’s not a perfect situation for MMM stock. But at the very least, management is banking on industries that make sense.
Asia Headwinds Are a Temporary Problem for 3M Stock
You can’t blame any one factor for the Q1 disaster. That said, you can’t ignore the giant elephant in the room: the U.S.-China standoff negatively impacted 3M’s Asian-market sales.
The tit-for-tat lasted for far longer than many political observers anticipated. But because the pain on both sides of the Pacific was so intense, the Trump administration appeared willing to negotiate with its Chinese counterparts.
Apparently, that was wishful thinking. In a stunning plot twist, President Donald Trump raised tariffs on roughly $200 billion in Chinese goods from 10% to 25%.
Still, with a critical election coming up in 2020, Trump must do everything possible to grow the economy. Therefore, look for a substantive deal with the Chinese eventually, which will benefit 3M stock longer-term.
3M Stock has Relevant Products
I’ll never forget a conversation I had with my friend, who formerly worked in the extermination business. In the era of smartphones and GPS navigation, I questioned why he continued to buy Thomas Guide maps.
He answered a question with a question: what happens if your smartphone battery suddenly dies or your car conks out? Do you tick off your clients while scrambling for an excuse? In this case, my friend had a back-up plan ready to go.
And that’s really one of the ironies of this digital age. As we dive further into the Internet of Things, “analog” products become even more relevant, not less. That’s because we can’t forget a core tenet of technology: it fails, and usually at the worst time possible.
You might laugh at archaic innovations like Post-it Notes. But after all these years, I’ve never worked in a business that didn’t have them. And no computer is worth more than a piece of sticky paper if that computer doesn’t work. That’s why even if it’s risky, MMM stock is worthy of your consideration.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
