3M delivered a hit and miss second quarter on Tuesday. While the company's earnings of $2.58 per share came in above expectations, revenues of $7.81 billion were slightly shy of estimates. The company also narrowed its full year guidance to a range of $8.80 to $9.05, from $8.70 to $9.05 earlier.
Led by gains in the Electronics & Energy segment, which saw declines for much of last year, the company was able to deliver positive organic growth of 4% in the quarter. All five of its segments reported positive organic growth – 8% in Electronics & Energy, 4% in Industrial, 3% each in Safety & Graphics and Healthcare, and 1% in Consumer. During the quarter, the company also made strategic investments of $178 million, $39 million of which were growth-related, while $139 million were portfolio and footprint actions. Such strategic investments are likely to continue during the remainder of the year as well, and will have an impact of $0.20 to $0.25 on EPS. These actions are being undertaken to improve the productivity from the manufacturing and supply chain base in the future. Despite a relatively strong quarter, the company's stock took a hit, falling by around 5% on the day.
So Why Did The Stock Price Decline?
1. Sales Miss: 3M missed consensus revenue expectations by $50 million. Some factors negatively affecting the sales growth were divestitures of non-strategic businesses and foreign exchange fluctuations, which impacted revenues by 1% and 0.6%, respectively.
2. EPS Guidance: While the company revised the lower end of its guidance upwards, the midpoint of the range, $8.925, trailed consensus estimates of $8.98.
3. Disappointing Core Pricing: While the company has resorted to price increases in the past to drive growth, this metric declined 0.3% in the quarter, and was down by 40 basis points in the U.S. In Asia Pacific, strong volume growth in E&E contributed to price declines, and in Latin America, where weak currencies contributed to price growth in the past, relatively stable currencies this time resulted in the drop. In the U.S., the company expects the price growth to be closer to flat for the full year.
Margin Growth Led By Divestitures
On the face of it, a 360 basis point improvement in margins is very impressive. However, if we delve a little deeper, a majority of this expansion has been a result of the divestitures undertaken in the Safety & Graphics business, which improved its margins substantially. Its other businesses, besides E&E, witnessed margin contractions. Once divestiture gains on its margins are discounted, the metric actually underwent a decline overall. In the second half of the year, the company expects its Industrials segment to post a 50 basis point margin improvement. This is expected to be driven by price increases, improved results from its productivity programs, and cost-cutting.
The company has been undertaking a number of strategic investments, slated to total approximately $400 million this year, which are expected to yield significant savings to the company. When such initiatives include steps like reducing the workforce, the payback is quick. However, when it involves optimization of manufacturing or supply chain, such as what 3M has been doing recently, the fruits of this labor take a while to reflect in the margins.
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