3M Analyst Sees Positive Risk-Reward After Q1 Miss, Sell-Off

Shares of 3M Co MMM nosedived after the company reported lower-than-expected first-quarter results Thursday and reduced its full-year adjusted EPS guidance. The company plans to cut 2,000 jobs.

The investor response not only reflects challenging macro trends and mix issues, but also execution issues and environmental concerns that take time to resolve, according to Credit Suisse.

The Analyst

John Walsh maintained an Outperform rating on 3M and reduced the price target from $220 to $208.

The Thesis

3M reported first-quarter adjusted EPS of $2.23, significantly short of the consensus estimate of $2.49. Adjusted operating margins contracted by 160bps to 21.4 percent, mainly due to productivity challenges and a 2-percent decline in organic volume.

The conglomerate projected another organic revenue decline in the second quarter and lowered its 2019 adjusted EPS guidance from a range of $10.45-$10.90 to $9.25-$9.75.

Following the recent sell-off, the stock’s risk-reward appears positive, Walsh said in a Friday note. (See his track record here.) 

The analyst said he expects the second quarter to be noisy rather than catalytic for the stock. Organic sales growth is likely to be sequentially flat in the second quarter, he said, gadding that EPS is also expected to fall in the same range as the first quarter. 

3M shares may begin to appreciate as the company executes on its new restructuring program and investors gain confidence in its performance improving in the back half of 2019, Walsh said. 

The restructuring initiatives could result in savings of $100 million in the second half of 2019 and $225-$250 million in 2020, according to Credit Suisse. 

Price Action

3M shares are down nearly 13 percent since the quarterly print, but were trading up 0.5 percent at $191.67 at the time of publication Friday.

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