3M shows solid growth but lowers outlook
The impact of a stronger dollar is offset by the company's global manufacturing and sourcing network.
3M earned $1.65 per share, up 8.6% year-over-year in the third quarter. However, revenues declined 0.4% year-over-year to $7.5 billion in the third quarter due to the unfavorable impact of currency translation. Also, due to a weak global economic environment 3M cut its growth outlook for 2012.
We currently have a stock price estimate of $93.36 for the company, approximately 5% above its current market price.
Strong dollar impacts top line
In the third quarter, sales of 3M declined 0.4% year-over-year in dollar terms. Sales increased 2.2% year-over-year in local-currency terms and acquisitions added another 0.5% year-over-year growth to the top line. But currency translation to a stronger dollar impacted sales by 3.1% year-over-year in the third quarter.
The appreciation in the value of dollar impacted 3M severely as the company received more than 75% of its sales from outside of the U.S. The impact was most severe on sales from Latin America and Europe where conversion to a stronger dollar reduced these by 7.4% and 8.4% respectively, on a year-over-year basis. In the third quarter, the dollar traded in the range of $1.20-$1.30 to a euro compared to a range of $1.35 ? $1.45 in the third quarter of 2011.
In local-currency terms, sales increased 4.3% year-over-year in the health care division, driven by strong growth in emerging markets; 3.3% year-over-year in the industrial and transportation division, driven by strong demand in automotive OEM and aftermarket; 1.4% year-over-year in the consumer and office division; 1.3% year-over-year in the display and graphics division; and below 1% year-over-year in the other businesses of 3M.
Geographically, excluding the impact of foreign currency translation, sales growth was the highest in Latin America at 10.5%. While sales grew at 2.3% year-over-year in the U.S.
Earnings not impacted by currency translation
Earnings were not impacted by currency translation as costs associated with global manufacturing and sourcing also declined. Operating income improved in all business divisions of 3M except safety, security and protection services where it declined marginally. While operating income in consumer and office products division was flat year-over-year.
Outlook cut on uncertain global economy
However, the challenges facing the company are numerous, including a continued slowdown in Europe, uncertain growth environment in other developed nations and slow growth in emerging economies.
Taking a realistic view of these challenges, 3M lowered its growth forecast for full year 2012. The revised 2012 outlook forecasts earnings in the range of $6.27 per share – $6.35 per share, down from $6.35 per share – $6.50 per share indicated earlier. This compares to earnings of $5.96 per share in 2011.
Overall, 3M has done well to post growth in earnings in the third quarter at a time when the global economic environment remains weak. But it faces a challenging growth environment over the near term.
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