The Rising Influence of Rising Affluence

[DewDiligence]

3M’s 3Q10 Profit Jumps, but Tepid Outlook Weighs

[No company is perfect—not even 3M. Objectively, the 3Q10 numbers were not bad, especially when you consider that the H1N1 scare in late 2009 created an artificially high comparator for the healthcare and security segments and the acquisition of COGT (#msg-53865254) shaved a few pennies from GAAP EPS. However, the 3Q10 numbers and outlook for the rest of 2010 failed to live up to Wall Street’s lofty expectations, and hence the stock is off 5% since the quarterly results were reported on Oct 28.

3Q10 GAAP EPS was $1.53 and overall YoY sales growth was 11%. YoY sales growth by segment was: industrial/transportation +14%; healthcare +2% (fewer H1N1 masks); display/graphics +18%; consumer/office +11%; security -2%; electro-communications +23%.

3M narrowed its full-year GAAP EPS guidance to $5.59-5.63 (from $5.54-5.69) and its non-GAAP EPS guidance to $5.70-5.74 (from $5.65-5.80); the non-GAAP numbers exclude the one-time hit from US healthcare reform.

The bottom line is unchanged: 3M is one of the best plays on The Global Demographic Tailwind and deserves to be a core holding in any portfolio, IMO.]

http://www.reuters.com/article/idCNN2528200020101028

›Thu Oct 28, 2010 2:42pm EDT
By James B. Kelleher

CHICAGO, Oct 28 (Reuters) - 3M Co (MMM) reported a higher quarterly profit on Thursday, lifted by strong sales to the consumer electronics industry, but it trimmed the top end of its full-year forecast and said rising raw materials costs and other pressures were cutting into margins, sending its shares sharply lower.

The diversified manufacturer, which makes a variety of medical products, also posted slower organic sales growth than in previous quarters because the flu season-related lift in surgical mask sales it enjoyed last year during the H1N1 virus scare is gone.

It said the long economic downturn also appears to be discouraging patients from undergoing elective procedures that use its products.

"Part of it is adverse comps from the H1N1 sales of respirators and masks, which were very strong in the third and fourth quarters last year," said Nicholas Heymann, an analyst at Sterne Agee. "Part of it was higher raw material costs, which appear to be peaking here."

The company also flagged what it characterized as temporary "turbulence" in the flat panel TV market as a result of a double-digit drop in sales during the third quarter that is coinciding with a shift in technology from sets using LCD technology to sets using LED technology. 3M makes optical film used in the screens.

As a result, TV manufacturers are expected to clear out -- in 3M's words "flush" -- their swollen LCD TV inventories during the fourth quarter, a move Heymann said would have an impact on 3M's fourth-quarter results.

"That was the straw that broke the camel's back," Heymann said, referring the selloff in 3M's shares.

The company also sounded a cautious note about the underlying health of two key markets, the United States and Western Europe, saying the economic outlook in both was "uninspiring" and that it expects "an extended period of slow recovery."

Its shares, which hit a 52-week high earlier this week, fell as much as 7.3 percent on Wall Street. They were last down about 6 percent at $84.94.

3M posted a third-quarter profit of $1.1 billion, or $1.53 a share, up from $971 million, or $1.35 a share, a year earlier.

The company, which makes products ranging from Post-It notes and Scotch tape as well as industrial and electronics products, said sales rose 11 percent to $6.9 billion, with double-digit sales increases in three of its six units.

Analysts, on average, expected Minneapolis-based 3M to report a profit of $1.51 a share on sales of $6.83 billion, according to Thomson Reuters I/B/E/S.

The company said it now expects a full-year profit of $5.70 to $5.74 per share, down from a previous estimate of $5.70 to $5.80 a share. It said the reduction was "due solely to anticipated earnings dilution" related to a series of acquisitions it made during the quarter, including its $900 million purchase of Cogent Inc, a maker of identification systems used to screen travelers at border crossings [#msg-53865254].

"We live in a quarter where it is expected that you beat your number and raise your estimate," Brian Langenberg of Langenberg & Co, an investment advisory firm in

"They met and they took down the high end of guidance because of deal dilution, which is understandable. But that won't be good enough for traders today," he said.

Oliver Pursche, the co-portfolio manager of the GMG Defensive Beta Fund, which does not own 3M shares, said the sell-off was an opportunity for investors.

"We view this as an entry point," said Pursche, who is also the president of Gary Goldberg Financial Services, an investment advisory firm with $500 million in assets under management.

"We've been hearing a lot of caution from corporate managements because everyone is being more careful given the overall global economic environment. But for more conservative clients in separate accounts business who are looking for long-term capital appreciation, this is going to be a stock that we are going to own for them."‹