Slowdown In China & Weak Auto Demand To Weigh On 3M’s Q2 Earnings

by Trefis Team
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3M (NYSE: MMM), a diversified technology company with a global presence, is set to announce its Q2 2019 results on July 25, 2019 followed by a conference call with analysts. End-market softness in China as well as lower demand in the automotive and electronics industries are likely to have adversely affected the company’s revenues and profits in Q2. Trefis estimates 3M’s valuation to be $187 per share. We capture trends in 3M’s Earnings over recent quarters in an interactive dashboard along with our forecast for full-year 2019. You can modify any of the key drivers to visualize the impact of changes on the company’s share price estimate. Additionally, you can see all Industrials data here.

A Quick Look At 3M’s Revenues

3M reported $32.7 billion in Total Revenues in Fiscal 2018. This included 5 revenue streams:

  • Industrial Business: $11.4 billion in FY 2018 (35% of Total Revenues). This segment serves a broad range of markets with products including vinyl, polyester, foil and specialty industrial tapes and adhesives.
  • Safety and Graphics Business: $6.3 billion in FY 2018 (19% of Total Revenues). This segment derives revenue by providing products that increase the safety and productivity of people, facilities and systems
  • Consumer Business: $4.4 billion in FY 2018 (14% of Total Revenues). The Consumer segment offers products including office supply products, stationery products, home care products and consumer health care products.
  • Healthcare Business: $5.6 billion in FY 2018 (17% of Total Revenues). Health Care segment sells medical tapes, dressings, wound closure product as well as surgical drapes, masks and preps, electrodes and stethoscopes
  • Electronics and Energy Business: $5 billion in FY 2018 (15% of Total Revenues). The Electronics and Energy segment serves customers in electronics and energy markets. Major product offerings of this segment include: LCD computer monitors, LCD televisions handheld devices such as cellular phones and tablets, notebook PCs and automotive displays.

Factors That May Impact Future Performance:

Industrial Business Woes Will Continue In Q2

  • 3M’s industrial business had a difficult Q1, with the business facing a broad-based slowdown across most of its portfolio. Organic sales declined by 2.8% due to weakness in automotive business and weak productivity (especially in businesses within Asia Pacific and the United States). We expect this trend to continue in Q2.
  • Automotive OEM business was the worst hit in Q1, and reported a 9% decline in revenues year-on-year. This was primarily due to a 6% decline in global car and light truck builds. With the automobile industry facing a slowdown across the globe (and particularly in China) we expect this slowdown will negatively impact the 3M’s industrial business top-line growth in Q2.

Electronics and Energy Business Will Likely Have A Difficult Q2

  • Electronic and Energy business delivered a rather soft performance in Q1. The segment’s organic sales declined by 3% (y-o-y) driven by weakness in electronics-related businesses.
  • Electronics-related growth has been impacted by soft end-market demand in Consumer Electronics and factory automation. With the electronics market in Asia slowing down, we expect this segment to continue to struggle in Q2 and throughout 2019.
  • However, this will be partially offset by strong demand in Energy business.

Cost Headwinds To Persist

  • Raw material headwinds were more than offset by price growth in 2018. The headwinds were primarily due to tariffs and higher-than-expected commodity prices and logistics expenses. Moreover, foreign currency translation had an additional 3.4 percentage point headwind to sales.
  • However, foreign currency net of hedging impacts increased margins by an additional 30 basis points in Q1. 3M expects foreign currency translation to reduce revenues by 1%, but have no net impact on earnings for the full-year 2019.

Slowdown In China To Impact Performance

  • The company’s manufacturing and exports-related business, especially to automotive customers under its Industrial segment, had shown considerable weakness in 2018. In Q1 2019, organic growth in China was down 4% due to softness in industrial and electronics business.
  • Moreover, sales in the Asia-Pacific region declined 3.6% in Q1, due to the slowdown in China’s automotive and electronics markets. With trade disputes between the U.S. and China escalating, we expect demand in China to remain soft in the near future – hurting 3M’s profits.

Per Trefis estimates, 3M’s EPS for full-year 2019 is expected to be $9.67. Taken together with a P/E of 19.4x, we arrive at a fair value of $187 for 3M’s stock (shows cash and valuation analysis), which is roughly 5% ahead of the current market price.

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