3M (NYSE:MMM) reported a rare miss in quarterly earnings and revenues. The Saint Paul, Minnesota-based diversified industrials company fell short of estimates, an unusual occurrence since 3M stock almost always meets or exceeds its quarterly expectations.
Both the third-quarter results and earnings guidance appear to signal pain for MMM stock in the near term. However, amid the pain, 3M still holds a popular product line and has long served as one of the most stable companies in American business. Given the previous report, investors should hold off for now and wait for a buy point later.
3M Reports a Rare Earnings, Revenue Miss
3M earnings for the third quarter came in at $2.58 per share. Analysts had expected $2.70 per share in quarterly profits. Still, this 12-cent per share miss represents a 10.7% increase from the same quarter last year when the company earned $2.33 per share. The company also reported a double-digit increase in cash flow. Revenues came in at $8.15 billion. This fell by 0.2% from year-ago levels when the company brought in $8.17 billion.
The earnings woes will not end with the quarter. Annual earnings guidance for 3M stock also suffered a downward revision. The company now expects to earn between $8.78 and $8.93 per share for the current fiscal year. The company had previously expected earnings of between $9.08 and $9.38 per share. This news sent shares reeling as MMM stock fell by over 7% after the open.
This takes 3M stock to new 52-week lows. Also, when breaking down sales growth by area, the Asia-Pacific region remains the company’s fastest-growing region for revenue. Investors remain well aware of this. The stock hit its 52-week high in January, right before the trade war with China began.
By May, the stock fell to levels seen today before temporarily bouncing higher. Now, 3M stock has dropped again, this time to levels below previous 52-week lows. Stocks which fall to these levels tend to keep making new 52-week lows. For this reason, I would not buy MMM stock now.
3M Stock Isn’t a Buy … Yet
However, reasons remain to look for a potential buying opportunity, particularly for investors wanting dividend income. It joins the likes of Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO) as a dividend king — stocks with a 50-plus-year track record of annual dividend increases. When the company raised its annual dividend to $5.44 per share this year, it saw its 59th yearly dividend increase. Also, despite this long streak of increases, the dividend yields about 2.9% for those buying today. If the slump continues, that yield will move much higher.
When looking at valuation, such a move remains possible. Even with the post-earnings decline, the stock trades at a price-to-earnings ratio of about 21. The P/E for the stock has averaged about 22.8 over the previous five years. Hence, we still do not see a massive discount for 3M stock at the moment.
3M remains a stable company with products that never fall out of favor. The earnings decrease represents a cyclical decline more than any long-term threat to its stability. Hence, I would not hold out hope for a massive drop in the P/E ratio. I would also expect the streak of dividend increases to continue.
Still, further moves down remain possible. I would not rule out a decline in the P/E ratio to the mid-teens or even lower-teens as we saw earlier in this decade. If this occurs and one wants a dividend payer, I would recommend 3M stock at that time.
However, for now, watch, and wait.
The bottom line on 3M stock
3M stock broke with its usual performance pattern, missing earnings and revenue estimates while guiding lower for the current fiscal year. This sent shares to new 52-week lows. Given the current trading pattern and the average P/E ratio, I expect more pain for MMM stock in the near term.
However, 3M remains one of the most stable companies in the world, and its 59-year streak of annual dividend increases should continue. More importantly, income-oriented investors should watch this stock. If 3M stock falls to a P/E in the low- or mid-teens, investors should look to buy. They could benefit not only from a high and growing dividend, but also from a stock that could see its P/E climb back to current levels. With MMM stock, investors should exercise patience, not options.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.