3M (NYSE:MMM) announced first-quarter results April 28 that were better than expected, beating analyst estimates on both the top and bottom line. MMM stock jumped on the news.
The company benefited from strong demand for N95 respirator masks, a much-needed tool for healthcare workers fighting the novel coronavirus.
“When the virus broke out, we were able to immediately activate our surge capacity and maximize production,” chief executive Mike Roman said on the company’s earnings call. “Beginning in January, 3M doubled our global output of N95 respirators to about 100 million per month, including 35 million per month in the U.S.”
The company also said that it expects to get up to 50 million masks per month by June.
While 3M delivered to shareholders the first bit of good news it’s had in a long time, the company isn’t out of the woods by a long shot. If you think it’s headed back to $250, you might want to holster that excitement.
Here’s why.
MMM Stock Needs Greater Contributions Than Just N95 Masks
On the top line, 3M reported sales of $8.08 billion, $17 million higher than the consensus estimate. On the bottom line, 3M’s adjusted earnings were $2.16 a share, 13 cents higher than analyst expectations.
Hey, never look a gift horse in the mouth. The results could have been worse.
“In the first quarter, we saw strong growth in personal safety, as well as in other areas such as home improvement, retail cleaning products, food safety and biopharma filtration,” Roman stated in its earnings call. “At the same time, we saw weak demand in several other end markets, with the biggest slowdowns in oral care, automotive, aerospace and general industrial.”
The press keeps writing about the N95 masks and how strong the demand has been, which it has. Still, the company’s Safety and Industrial business, which produces the masks, didn’t exactly hit a home run in the first quarter with a 1% decline in sales to $2.9 billion, offset by a 14% increase in operating income to $726 million.
Another number that’s attracting a lot of attention is the 21% increase in sales from its healthcare segment. However, if you excluded 3M’s acquisitions in 2019, sales rose by just 1.2%. Further, the unit’s operating income fell 1.7% to $456 million.
Overall, if you exclude the healthcare acquisitions, the segment’s sales in the quarter would have been $1.76 billion instead of $2.1 billion. Subtract the $340 million from its overall revenues in the first quarter; sales would have fallen 1.6% instead of growing by 2.7%.
At the end of the day, if not for the healthy margins in its safety and industrial segment (think N95), 3M’s stock likely would not have gone up post-earnings.
It’s Got a Long Way to Go to Get to $250
MMM stock traded at $250 in January 2018. It had just come off a year in which overall sales grew by 5.1% while its operating income rose by 8.3%, good for a 21.3% return on invested capital. That’s 377 basis points higher than its current ROIC.
3M’s five operating segments all experienced growth in 2017, whereas in its latest quarter, its transportation and electronics segment had a 3% decline in sales and a 7.3% drop in operating income, while healthcare eked out 1.2% growth in sales and a 1.7% decline in operating income.
Things aren’t perfect at 3M, and they’re about to get worse.
“We believe Q2 results will be especially challenged, given the trends we have seen so far in April, with revenue and EPS declines year-over-year,” Roman stated.
In my last article about 3M in mid-March, I suggested that MMM stock was a good value play because it’s historically been able to generate healthy free cash flow in times of difficulty. Covid-19 qualifies as a difficult time.
Since then, it’s risen by nearly 12% to the high $140s. Unless 3M delivers a dreadful second quarter, the odds of it falling under $100 are very remote. However, the odds of it revisiting $250 anytime soon are even more remote.
Should you buy 3M after its first-quarter results?
If you’re planning to own the stock for three to five years, I would say yes, but keep some cash in case the markets take another tumble over the summer. Under $140, I see it as an excellent long-term buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
