3M (NYSE:MMM) will announce its third quarter earnings on coming Tuesday, October 23.  The company is expected to post moderate growth on the back of its steadily growing health care business in emerging economies and the recovering industrial sector in the U.S. However, the slowdown in Europe and weakness in the consumer electronics industry in the Asia-Pacific region will continue to impact its growth. In addition, a stronger dollar in the third quarter will adversely impact international earnings of the company. And, as 3M receives more than 75% of its sales from outside of the U.S., this effect will be quite significant for it. 
We currently have a stock price estimate of $97 for the company, nearly 5% above its current market price.
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Growing health care industry in emerging economies will drive growth in the third quarter
The healthcare industry in emerging economies of India and China is growing quickly as it benefits from a growing middle class and higher government healthcare spending. 3M’s Healthcare division, which provides medical and surgical supplies, skin infection prevention products, dental and orthodontic products and health information systems, is benefiting from this growth. In the six months ended June 30, 2012, organic local-currency sales at 3M Healthcare increased by 12% y-o-y in Latin America and 10% y-o-y in the Asia-Pacific region. This compares to growth rates of 3% in the U.S. and 1% in Europe.  We anticipate the trend to continue in the third quarter as the growing healthcare industry in emerging economies continues to drive growth at 3M Healthcare. The division constitutes nearly 22% of the overall value of the company.
Recovering industrial sector in the U.S. to add to growth
In addition, the industrial sector in the U.S. has seen a modest recovery since the financial crisis of 2008-09. Even though the sector is well below its peak levels, it has helped 3M’s Industrial and Transportation division to post moderate growth. The division provides products that 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, and we anticipate the sector’s growth in the third quarter to add to 3M’s growth.
Weak consumer electronics industry in Asia-Pacific to impact growth
However, over the past few quarters the consumer electronics industry, particularly in Asia-Pacific and Europe has remained weak on account of declining LCD prices. And, the last quarter’s data suggests that volumes too have declined.  This has had a severe adverse effect on 3M’s Display and Graphics division which manufactures optical film solutions for LCDs and computer screen films. Sales in the division stood at $1.7 billion in the first-half of 2012, down 10.5% compared to the year-ago level.  As the weakness in the industry persists, we anticipate the trend to continue to impact 3M’s earnings in the third quarter.
Continuing slowdown in Europe will also weigh on growth
We also anticipate the economic slowdown in Europe to continue to impact sales in the third quarter across all business divisions of 3M. In the previous quarter, sales from the region declined by 10.9% y-o-y.  And, as Europe accounts for approximately 20% of the overall sales of the company, this decline impacts it significantly.
Also, a stronger U.S. dollar will unfavorably impact international revenues in the third quarter
Also, the U.S. dollar has remained strong against several major currencies particularly the euro, impacting international sales of 3M unfavorably. The dollar traded in the range of $1.20 – $1.30 to a euro in the third quarter of 2012, compared to a range of $1.35 – $1.45 in the third quarter of 2011.  This appreciation in dollar’s value will adversely impact 3M’s international sales, which constitute more than 75% of the company’s total sales.
All in all, 3M is expected to post moderate growth in the third quarter driven by the growing healthcare industry in emerging economies and the industrial sector in the U.S.. However, earnings will be partially offset by the continuing slowdown in Europe, a weak consumer electronics industry and a stronger dollar.Notes: