had a ton of news to share beyond earnings Tuesday. Investors focused on the positives.
The good news: The company reported second-quarter earnings that beat expectations and said it was spinning off its multibillion-dollar healthcare business.
The Bad News:
(ticker: MMM) cut its full-year financial forecast. The good news is outweighing the bad in early trading.
Shares are up 5.2% to $141.07 in Tuesday morning trading. The
Dow Jones Industrial Average
are down 0.5% and 0.4%, respectively.
Tuesday morning, 3M reported adjusted earnings per share of $2.48 in the second quarter, beating Wall Street’s forecast for $2.41, according to FactSet. Sales of $8.7 billion were down year-over-year but beat estimates for $8.57 billion.
Looking ahead, the company dropped its full-year EPS projection to a range from $10.30 to $10.80, down from $10.75 to $11.25 earlier. Sales are also expected to come in between -0.5% and -2.5%, worse than management’s prior outlook for growth of 1% to 4%.
A stronger U.S. dollar and “uncertain macroeconomic environment” were blamed for the cut.
Separately, the 3M said it would spin out its healthcare business. Healthcare generates almost 25% of 3M sales, and a little more than 25% of its operating profit. Over the past 12 months, 3M Healthcare has generated about $8.7 billion in revenue selling dressings for wounds, healthcare IT services and other things. 3M said it would retain a nearly 20% stake in the new company.
Investors have been waiting for a while for 3M to do something significant. Shares have lost investors about 5% a year on average for the past three years. The S&P 500 has made investors about 11% a year on average over the same span. Those losses have left shares trading for about 12 times estimated 2022 earnings, just about the lowest PE ratio for the stock over the past few years.
RBC analyst Deane Dray suggests 3M was right for a breakup back in March. Along with a healthcare spin, 3M also has consumer and industrial businesses that might be spin candidates.
Aside from the spinout there are still other significant issues for investors to mull over. The company said its Aearo Technologies business voluntarily filed for bankruptcy in a bid to resolve claims against its Combat Arms earplugs it sold to the military. A few settlements related to military veterans’ hearing loss have been reached, but several remain. The company said that if not for its action taken Tuesday, “claims could take years, if not decades, to litigate on a case-by-case basis.”
In addition to that litigation, 3M still faces bills to clean up chemicals once used in its plants that have made it into groundwater. Those chemicals are referred to as PFAS.
In the past, 3M stock traded at a premium to the S&P 500. That’s no longer the case. Now the difference between 3M’s price/earnings ratio before legal troubles and where it is today implies roughly $38 billion of lost market capitalization. Investors now have to decide if that is the right amount or too much given the healthcare spin which can unlock some value as well as the overhangs from ear plugs and PFAS.
3M’s market cap now sits at about $76 billion.