3M Disappoints in Q1 2019, Will Growth Pick Up In The Next Quarters?

3M (NYSE: MMM), a diversified technology company with a global presence, announced its Q1 2019 results on April 25, 2019, followed by a conference call with analysts. The company missed consensus for revenue which was recorded at $7.8 billion, down by 5% year on year. The decrease is mainly due to Organic local-currency sales decline of 1.1 percent among other factors. The earnings were recorded at $1.51, up by 54.1% year on year.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – What Has Driven 3M’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full-Year 2019? In addition, here is more Industrials data.

Key Factors Affecting Earnings:

Revenue falters in Q1 2019:

• 3M’s Total Revenue in Q1 2019 was recorded at $7.9 billion, down 5.0 percent year-on-year.
• This was attributed mainly to Organic local-currency sales decline of 1.1 percent, while divestitures (net of acquisitions) decreased sales by 0.5 percent. Further, foreign currency translation decreased sales by 3.4 percent year-on-year. Also, the company suffered mid-single-digits fall in China, automotive, and electronics collectively.

Trend in Expenses:

• Cost of Sales forms more than 60% of Total Expenses for 3M. This trend continued in Q1 2019 as Cost of Sales was 61.9% of Total Expenses.
• Research and Development is a major part of 3M as the company focuses a lot on innovation and it formed around 7% of Total Expenses in the last 2 years. In Q1 2019 this was recorded at 477 million (6.9% of Total Expenses).
• 3M Q1 2019 results were impacted by two litigation issues for which the company established a reserve of $235 million. It also increased its respirator reserve by $313 million to address the cost of resolving all current and expected future coal mine dust lawsuits in Kentucky and West Virginia, resulting in a litigation-related pre-tax charge of $548 million.

Full Year Outlook:

• For the full year, we expect gross revenue to increase by 3.9% to $34 billion in 2019.
• Growth is expected to come from Health care and Consumer business.
• Industrial segment will continue to be the highest contributor to revenue at 34.7% of Total Revenue in 2019
• EBITDA margin is expected to increase to around 33.6%.

Trefis has an estimate of $205 for 3M’s stock. Growth from the Health care segment and China are expected to push the stock price higher over time.

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