Source: PaxForex Premium Analytics Portal, Fundamental Insight
As the second quarter draws to a close, it's time to look at what results industry giant 3M can report and what investors can expect from the company before the end of the year.
Given the breadth of the company's impact on the economy and its size, management's comments and results are likely to be of interest to a wide range of investors.
The company faces a tough year, and as mentioned, several whether a 4.6% dividend yield is reason enough to buy the stock - not least because 3M is likely to report some more bad news in 2022.
Many other industrial companies have cut their forecasts due to negative cost and supply chain shortages. In contrast, 3M management decided to maintain its full-year organic revenue growth forecast of 2% to 5% and adjusted earnings per share of $10.75-$11.25 during its first-quarter results announcement. However, 3M CEO Mike Roman subsequently told investors in early June that conditions in the second quarter would be more challenging than previously anticipated.
What Roman said at the Bernstein Strategic Decisions Conference casts doubt on 3M maintaining its full-year outlook. The combination of a $300 million drop in revenue as a result of plant closures in China, worsening expectations for auto production, more significant than expected raw material cost inflation, and more severe than expected supply chain problems suggest that 3M will lower at least the upper end of its forecast.
It's no secret that the primary tool to combat rising costs is price increases, and 3M is no exception. Management's main goal is to offset rising costs and count on increased volumes to boost margins and profits. According to CFO Monish Patolawala, pronounced during the report: "Volume gives us the best leverage, so the more we can grow, the more additional leverage we have." Leverage refers to the measurement of how much more profit a company can make with a corresponding increase in revenue. Patolawala's comments emphasize that 3M generally prefers to increase volumes rather than raise prices.
That's fair enough, but the reality is that 3M's pricing actions seem to lag behind inflation. Here's what Patolawala said during his last earnings call: "We started last year with slow pricing, 0.14%, then raised prices to 1.4% in the third quarter and to 2.6% in the fourth quarter." And in the first quarter, "we had a plus 3% price increase in the quarter. The team is very focused on looking at the additional inflation that's coming in; they're already working on price increases."
So the question is whether 3M is late in raising prices. This is especially true when some end markets, particularly automotive and electronics, have lower growth expectations -- which could mean no volume impact on leverage.
Speaking about 3M's end markets, Roman noted in his presentation in early June that expectations for automotive production and industrial production, in general, are down. In addition, he spoke of "moderate" growth expectations in the transportation and electronics segment ($9.3 billion of the company's total sales of $35.3 billion in 2021).
Recall that current management projections call for organic revenue growth in 2022 from low to high single digits, a wide range reflecting uncertainty in 2022.
Organic revenue was down 0.3% in the first quarter, and growth in major end markets will be lower than expected in 2022, so it's hard to see how 3M can get anywhere near the high end of the segment's forecast.
Along with the rest of the industrial sector, 3M faces a challenging year, and the second-quarter earnings report is unlikely to contain much good news. There are valuation arguments for buying the stock, but they may become more compelling once the company informs investors of its outlook for the rest of the year.
As long as the price is below 134.50, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 129.07
- Take Profit 1: 127.75
- Take Profit 2: 125.35
Alternative scenario:
If the level of 134.50 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 134.50
- Take Profit 1: 136.70
- Take Profit 2: 140.00
