3M (MMM) reported disappointing third-quarter results Wednesday that showed negligible earnings expansion and guided to weak fourth-quarter performance. The firm is one of the few industrial names that have disappointed investors this earnings season, and we think such a weak report is by far an exception. We maintain that a recession is nowhere in sight, and our fair value estimate—which considers the long-term intrinsic value of the company–of $93 per share for 3M remains unchanged.
Worldwide organic sales growth advanced just shy of 3%, as the firm noted weakness in the electronics market (LCD TVs)—which was well known and expected—and slowing growth in the developed world (a trend that left little impact on other industrial firms sporting strong third-quarter results). Though we fall short of extrapolating the weakness into future periods or across the industrial sector, 3M did note that it witnessed customers reducing inventories in expectation of a slowdown. We continue to look for other companies mentioning a similar trend.
That said, the only real weakness in the period was with respect to the LCD TV end market, where revenue in its Display and Graphics segment declined 14%–something we had been expecting. 3M’s remaining five business segments expanded from the same period a year ago, with Industrial and Transportation advancing over 15%. In fact, 3M witnessed double-digit increases in abrasives, renewable energy, and aerospace. This suggests, in our opinion, that the results reflect more an isolated earnings disappointment than a transparent economic barometer to be extrapolated aimlessly, particularly as it relates to the global economy. Geographical expansion during the quarter increased across the board (even Europe advanced nearly 6%).
In response to the firm’s cost structure (expenses advanced greater than revenue in the period), 3M noted that it plans to implement a number of efficiency initiatives. Even so, however, the firm pulled back its earnings guidance for 2011 to the range of $5.85 to $5.95 per share – this was down from as high as $6.25 per share recently and represented an about-face in terms of the trend (it raised 2011 earnings guidance just last quarter from levels above the new range). The firm also cut its organic growth expectations to 4% from a previous range of 6% to 7.5%. We think such a move indicates that 3M has seen some significant weakness so far through its fourth quarter, or is setting the bar low for an easy beat. Either way, we remain on the sidelines and think there may be a better time to dabble in the firm’s shares.