Why Has 3M’s Share Price Sunk 30% Since Early 2018?

3M (NYSE: MMM), which makes everything from adhesive tapes to air filters, has seen demand for its products across categories fall since the second quarter of 2018 primarily due to weak customer demand in China. The slowdown in the world’s second-largest economy and, arguably, the most significant manufacturing economy globally, has had a visible impact on 3M’s revenues over recent quarters. The ongoing U.S.-China trade war has only made matters worse for 3M. Notably, the slowdown in China’s economy started in the latter half of 2017, but its major impact was felt after the beginning of the U.S.-China Trade war in early 2018 – which is when 3M’s stock began its decline from an all-time high of nearly $250 to around $175 now.

Trefis details the Impact of the U.S.-China Trade War on 3M in an interactive dashboard along with our forecast for full-year 2019. Additionally, you can find more Industrials data here

How Has 3M’s Stock Performed As Compared To Major Indices?

• 3M’s share price has declined roughly 30% since the beginning of 2018; falling from $250 in January 2018 to around $175 now
• Over this period, the S&P 500 grew 4.2% while the Dow Jones Industrial Average (DJIA) increased by 3.9%

How Important Is The Asia-Pacific Region To 3M’s Top Line?

• 3M’s revenues from the Asia-Pacific region account for roughly a third of its total revenues, with the overall contribution increasing steadily over recent years
• As China accounts for most of the revenues from this region, 3M’s revenues are sensitive to changes in the country’s economy

How Have 3M’s Revenues and Earnings trended since the beginning of the trade war?

• 3M’s Revenues have witnessed a year-on-year decline for each of the last four quarters.
• Moreover, 3M’s profitability has also taken a hit, with net income falling from $1.8 billion in Q2 2018 to about $1.1 billion in Q2 2019

How has a decline in Chinese imports impacted 3M’s Asia-Pacific Sales?

• China’s total imports steadily increased over the first three quarters of 2018 from $497 billion in Q1 2018 to almost $573 billion in Q3 2018.
• However, the growth rate slowed down in Q4 2018 and has declined in the first half of 2019.
• 3M’s Asia-Pacific revenue seems to be moving in tandem with trends in the Chinese economy. After increasing steadily over the first half of 2018, Asia-Pacific sales declined marginally in Q4 2018. These revenues then fell in the first half of 2019.

How has The Slowdown In China Vehicle Sales Impacted 3M’s Asia-Pacific Industrial Revenues?

• China’s passenger vehicle sales gradually increased in the first half of 2018. However, after the beginning of the U.S.-China trade war, the demand for passenger vehicles fell sharply in China.
• Negative market sentiments as well as an increase in import tariffs have adversely impacted China’s passenger vehicle sales.
• 3M’s Asia-Pacific industrial sales have been hurt by the slump in passenger vehicle demand in China. After steadily increasing in the first half of 2018, industrial sales slowed down in the Q3 2018.
• Moreover, the sales figure plunged by more than 12% in Q1 2019 as demand for China passenger vehicles dived. This trend continued in Q2 as soft end-user demand in China continued to negatively impact 3M’s revenues.

Which 3M Segment Has Been Hit The Worst Since The Beginning Of The Trade War?

• 3M’s Electronic and Energy business has been hit the worst since the beginning of the U.S.-China trade war. Electronics-related growth has been impacted by soft end-market demand in Consumer Electronics and factory automation.
• After a strong first half of 2018, Electronic & Energy segment revenues declined in the second half. This trend continued in Q1 2019 with electronics revenue sliding by roughly 12%.

Taking Into Account The Trade-War & China Slowdown: What is the Fair Value for 3M Stock’s?

• Although, the company will continue to face slow growth conditions in key end markets, 3M’s execution has remained strong.
• 3M has been able to successfully implement its restructuring while effectively managing costs and reducing inventory levels.
• With strong cost-saving measures in place, we expect 3M to overcome this difficult period and achieve steady growth in the long-run.
• Based on our forecast, 3M’s adjusted EPS for fiscal 2019 is likely to be around $9.51. Using this figure with our estimated P/E ratio of 19.4x, this works out to a price estimate of $185 for 3M’s stock (shows cash and valuation analysis), which is roughly 5% ahead of the current market price.

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