3M (NYSE:MMM) posted moderate growth in its third quarter earnings on cost control improvement and strong sales in the healthcare and automotive OEM sector. Earnings benefited from its global manufacturing and sourcing network that offset the impact of a stronger dollar on the company’s top line. Earnings were $1.65 per share, up 8.6% y-o-y in the third quarter. However, revenues declined 0.4% y-o-y to $7.5 billion in Q3 due to the unfavorable impact of currency translation.  Also, due to a weak global economic environment 3M cut its growth outlook for 2012.
We currently have a stock price estimate of $93.36 for the company, approximately 5% above its current market price.
Stronger dollar impacts the company’s top line in Q3
In the third quarter, sales of 3M declined 0.4% y-o-y in dollar terms. Sales increased 2.2% y-o-y in local-currency terms and acquisitions added another 0.5% y-o-y growth to the top line. But, currency translation to a stronger dollar impacted sales by 3.1% y-o-y in the third quarter.  The appreciation in the value of dollar impacted 3M severely as the company received more than 75% of its sales from outside of the U.S. The impact was most severe on sales from Latin America and Europe where conversion to a stronger dollar reduced these by 7.4% and 8.4% respectively, on a y-o-y basis.  In the third quarter, the dollar traded in the range of $1.20 – $1.30 to a euro compared to a range of $1.35 – $1.45 in the third quarter of 2011. 
In local-currency terms, sales increased 4.3% y-o-y in the Health Care division driven by strong growth in emerging markets, 3.3% y-o-y in the Industrial and Transportation division driven by strong demand in automotive OEM and aftermarket, 1.4% y-o-y in the Consumer and Office division, 1.3% y-o-y in the Display and Graphics division, and below 1% y-o-y in the other businesses of 3M. Geographically, excluding the impact of foreign currency translation, sales growth was the highest in Latin America at 10.5%. While sales grew at 2.3% y-o-y in the U.S. 
Earnings not impacted by currency translation
Earnings were not impacted by currency translation as costs associated with global manufacturing and sourcing also declined. Operating income improved in all business divisions of 3M except Safety, Security and Protection Services where it declined marginally. While operating income in Consumer and Office Products division was flat y-o-y.
But, an uncertain global economic environment prompts a cut in outlook
However, taking a realistic view of the challenges facing the company: a continued slowdown in Europe, uncertain growth environment in other developed nations and slow growth in emerging economies, 3M lowered its growth forecast for full year 2012. The revised 2012 outlook forecasts earnings in the range of $6.27 – $6.35 per share, down from $6.35 – $6.50 per share indicated earlier.  This compares to earnings of $5.96 per share in 2011. 
Overall, 3M has done well to post growth in earnings in the third quarter at a time when the global economic environment remains weak. But, it faces a challenging growth environment over the near term.Notes: