3M Earnings Will Show Gains From U.S. Recovery

3M (NYSE:MMM) has scheduled to announce its second quarter earnings on Thursday, July 26. We anticipate the company to post moderate growth on a year-over-year basis, driven by continuing growth in the manufacturing sector of U.S., offset by economic slowdown in Europe and weakness in the consumer electronics industry particularly in Asia-Pacific. We also anticipate higher pension plan contributions to impact net earnings of the company in the second quarter.

We currently have a price estimate of $97 for the company, approximately 10% above its current market price.

See our complete analysis for 3M here

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Growing manufacturing sector in U.S. aiding top line growth

The growth in the manufacturing sector of U.S. is expected to drive top line growth in the industrial division of the company that constitutes approximately 30% of the overall company value. Industrial division products include tapes, coated and non-woven abrasives, adhesives, specialty materials, filtration products, energy control products, acoustic systems, and components used in automotive, marine, aircraft and specialty vehicles. They serve a broad range of markets within the manufacturing sector. Thus, the growing manufacturing sector of U.S. will aid growth in the industrial division of the company.

Growing healthcare industry in emerging economies driving growth

Also, continuing strong growth in the healthcare industry of emerging economies particularly, China and India, is driving growth in the Healthcare division of the company. Products of the division include, medical and surgical supplies, skin infection prevention products, dental and orthodontic products and health information systems. The division constitutes nearly 22% of the company value.

Economic slowdown in Europe impacting revenue growth across divisions

However, we anticipate the continuing economic slowdown in Europe to impact sales across all business divisions of the company namely, Industrial, Healthcare, Consumer and Office Products, Safety and Security Services, Display and Graphics, and Electrical Materials.

Continuing weakness in the consumer electronics industry to impact revenues

We also anticipate the continuing weakness in the consumer electronics industry particularly, in Asia-Pacific and Europe, to impact sales of the company in the second quarter. The lower optical film volumes for LCD TVs has impacted sales for the company in its Display and Graphics business division. The division primarily manufactures and sells optical film solutions for LCDs and computer screen films.

Rising pension contributions to impact net earnings

The low interest rates have impacted returns on pension plan assets of the company. As a result, it has had to contribute significant cash towards the underfunded pension plans. The company anticipates to contribute approximately $1 billion of cash to its pension plans in 2012. It contributed $337 million in the first quarter, and we anticipate significant contributions in the second quarter as well, impacting net earnings. ^[1]

On the whole, we anticipate 3M to post moderate growth in the second quarter, driven by growth in the U.S. manufacturing sector and healthcare industry of emerging economies. The growth is expected to be impacted by continuing economic slowdown in Europe, weak consumer electronics industry in Asia-Pacific and higher pension contributions.

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1. 2012 Q1 10-Q, May 3 2012, www.3m.com [↩]