3M (MMM) reported modest fourth-quarter earnings expansion Thursday and offered an outlook for 2012 that was consistent with our expectations. We’re sticking with our $88 per share fair value estimate at this time.
Total sales advanced 5.7% on the heels of organic local-currency sales growth of 3.3% (1.3 percentage points coming from volume and the balance of the organic expansion from pricing). The company noted that revenue expansion was strongest in its Industrial and Transportation segment (abrasives, aerospace, industrial adhesives and tapes, etc.), which increased 14.3% during the period. Safety, Security, and Protection Services (SSPS), Consumer and Office (stationery products, office supplies, etc.), and Health Care (infection prevention, skin and wound care, etc.) experienced advances in revenue during the period, but revenue from its Electro and Communications and Display and Graphics (optical films, etc.) segments fell, the latter off 8.8%. The Display and Graphics segment continues to be impacted by slower consumer electronics activity and lower LCD TV attachment rates. However, we believe weakness in its consumer electronics segment is more firm-specific to 3M, as other consumer electronic firms (namely, Apple—AAPL) continue to experience significant growth. 3M saw strength in all of its geographic regions, though it did admit deteriorating conditions in Europe and had this to say about
3M’s earnings per share came in at $1.35 (consensus was at $1.31 per share), a 5.5% increase from the same period a year ago. The firm’s operating margin pretty much held the line at 19.2% during the period, down from 19.4% in the same period a year ago. 3M faced a slightly higher tax rate in the quarter, but share buybacks helped to drive the per-share bottom-line expansion. During 2011, 3M pulled in almost $5.3 billion in cash flow from operations and shelled out roughly $1.4 billion in capital expenditures, putting free cash flow at just over $3.9 billion, over 13% of sales. Needless to say, 3M is a veritable cash cow.
Looking ahead, the company affirmed its 2012 full-year guidance, with earnings expected to be in the range of $6.25 to $6.50 per share, the midpoint above consensus expectations, and organic sales volume growth of 2% to 5%. 3M expects operating margins to come in between 21% and 22.5%, below the firm’s fourth-quarter performance. The firm expects this performance to be back-end loaded, as sales and profit growth will present a challenge during the first half of the year thanks to European and consumer electronics weakness.
All things considered, though we like the cash-generating prowess of 3M, we think the shares are fairly valued at today’s levels, and we remain on the sidelines.