Streetwise for Sunday, May 5, 2019

To the uninitiated Wall Street must appear to be a creature spawned by the manufacturers of antacids. At the same time, there remains a tendency on the part of investors to want to focus on a hyperbole of various media opinions regarding market trends. 

That is wrong. Concentrate your efforts on buying undervalued stocks, not market forecasts or history lessons. Specifically, you want information that will assist you in pinpointing individual companies that are hard at work at improving their positions in their respective marketplaces.

How about a company with countless products that virtually everyone and anyone will meet almost every day of their lives? The company is 3M (MMM), one of the most battered stocks in recent memory.

Shares of 3M Company plummeted nearly 13 percent after missing earnings expectations. This was its worst performance since Oct 19, 1987, better known as Black Monday. Yet, is it possible that the flame of innovation and creativity still burn brightly within 3M? See for yourself.

3M began in 1902, with five founders and a simple goal: to mine for corundum, a mineral ideal for making sandpaper and grinding wheels. Turns out, what they thought was corundum was really another low-grade mineral called anorthosite.

Discovering the poor-quality mineral could have caused an early end to the fledgling company, but the founders persisted. Why? Because something more important was born that first year: the spirit of invention and collaboration that forms the foundation of 3M. 

Today, more than 60,000 3M products are used in homes, businesses, schools, hospitals and other industries. And one third of the company’s sales come from products invented within the past five years.

There is no question that the company’s first quarter did not place it in the good graces of Wall Street. The company posted Sales of $7.9 billion, down five percent year-over-year. However, GAAP earnings were of $1.51 per share vs. $0.98 a year ago year, up 54.1 percent year-on-year.

Adjusted earnings came in at $2.23 per share as compared to $2.50 a year ago, down 10.8 percent. That earnings number excludes $1.52 per share for adjustments to provisional accounting for the Tax Cuts and Jobs Act (TCJA) and significant litigation-related charges.

Adjusted operating margins contracted by 1.6 percent to 21.4 percent, mainly due to productivity challenges and a 2-percent decline in organic volume. 

The company projected another revenue decline in the second quarter and lowered its 2019 adjusted earnings guidance to a range of between $9.25 and $9.75 per share.

A restructuring focused on cost-cutting is currently underway. While 3M’s core R&D does not appear in danger, about 2,000 jobs could be cut to save about $200 million.

3M shares could potentially appreciate in price as the company executes on its new restructuring program and confidence in its performance improves during the latter half of 2019. Moreover, the restructuring initiatives will likely mean savings of about $100 million in the second half of 2019 and as much as $250 million in 2020.

In the wake of its poor first quarter, the company reduced its guidance substantially, with the full-year revenue growth outlook now being between a negative 1 percent to a positive 2 percent, with an EPS $9.50. And yes, a 3 percent long-term revenue growth could still be achievable.

The key going forward is the intrinsic value of the company’s shares. Using a discounted free cash flow to the firm model the intrinsic value is $217.49 per share, which is 16.3 percent above the recent share price, utilizing a 10-year Treasury rate of 2.48 percent and an average revenue growth rate of 5.37 percent. Coincidently, the intrinsic value coincides closely with what other analysts have calculated using similar models.

My estimated earnings number for 2019 is $9.75 per share with a 12-month projected share price of $196.25 for a 5 percent capital gain. The shares recently traded at $186.98, and there is an indicated dividend yield of 2.77 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to ww.RuddReport.com.