Diversified technology firm 3M Company (NYSE: MMM) saw its stock decline by about 5% in the past week after the company reported lower than anticipated fiscal 2017 second-quarter revenues. The earnings, however, surpassed analysts’ estimates. 3M also raised its full-year 2017 earnings and organic sales growth guidance. Still, we believe that the stock would decline further due to the reasons given below.
The Saint Paul, Minnesota-based company reported second-quarter 2017 revenues of $7.810 billion, up from $7.662 billion, but lower than Zacks Consensus estimates of $7.879 billion. Aided by a gain of $461 million from the sale of businesses, the Post-it manufacturer recorded a 2Q17 net income of $1.583 billion, or $2.58 per share, compared with $1.291 billion, or $2.08 per share, in 2Q16. The FactSet analysts had anticipated 3M to report earnings of $2.54 per share.
Segment-wise, Industrial revenues increased 2.5% y-o-y to $2.7 billion. Likewise, Health Care revenues were $1.4 billion, up 1.8% from last year. Electronics & Energy revenues jumped 7.5% to $1.2 billion, on a year-on-year basis. Consumer revenues increased marginally by 0.5% to $1.1 billion. However, Safety and Graphics sales declined 0.9% to $1.5 billion.
At the end of second quarter, the company had cash, cash equivalents, and other investments worth $2.79 billion, up from $2.68 billion at the end of full-year 2016.
The company also raised its FY17 outlook as business conditions are turning favorable. 3M now expects full-year earnings in the range of $8.80 to $9.05 per share, up from the prior forecast range of $8.70 to $9.05 per share. Organic sales are expected to grow at 3% to 5%, from 2% to 5% projected earlier.
The Wall Street analysts are forecasting earnings of $8.95 per share on revenues of $30.77 billion in fiscal 2017. During the quarter, the company returned $1.2 billion in the form of dividends ($701 million) and share repurchases ($494 million).
Without the divestiture gains of $461 million, the net income would have been lower than analysts’ estimates. The PE ratio of the stock is 24.3, while the historic average is 19.1. Similarly, the stock trades at a price to book ratio of 10.9x, which is almost double the historic average of 5.9x. Thus, it is amply clear that the stock is fully valued as of now. So, despite an increase in revenue and upwardly revised FY17 EPS estimates, we forecast a short-term decline in the share price.
Technically, the stock has broken the support at 206. The next major support is at 194. The negative reading of the MACD histogram and the sharp decline of the momentum indicator suggests a further downtrend in the share price of 3M. Thus, it would be prudent to remain short in the scrip.
We would like to bet on the stock’s decline by purchasing a low or below option offered by one of our binary brokers. The investment would be made only if an expiry date around August 11th is available. Additionally, the stock should be trading near $206 at the time of investment.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
