Earnings Preview: How 3M Could Rock the Dow

January 28, 2019 by Jon C. Ogg

The last week of January will mark the zenith of the Dow earnings season. While most investors will be looking closely at the fourth-quarter earnings per share and revenue data, actually it is the guidance for the first quarter of 2019 that will lead analysts to make their upgrades and downgrades, based upon overall implications for 2019 as a whole.

3M Co. (NYSE: MMM) is set to report its fourth-quarter earnings results on Tuesday. The company has found its numbers lacking growth and its shares have been under pressure in recent months. According to Thomson Reuters, analysts have consensus estimates of $2.28 in earnings per share (EPS) and $7.87 billion in revenue for the quarter. Those would compare to $2.10 EPS and $7.99 billion for the same period a year earlier.

For the first quarter of 2019, the consensus estimates are $2.59 EPS and $8.2 billion in revenues. That compares with $2.50 EPS and $8.28 billion in revenues posted in the first quarter of 2018.

Where things will be challenging is for analysts to look through to 2019 earnings revenues. Those have consensus estimates of $10.75 EPS and $33.4 billion in revenues. What makes these consensus estimates harder for analysts to predict is that 3M has not been reporting positive trends lately. So, analysts are magically expecting rekindled growth versus projected 2018 results of $9.95 EPS and $32.7 billion in revenues. 3M shares are down more than 25% from their highs of 2018, but the reality of adding up an impact from U.S.-China trade woes and slower economic growth in the United States and abroad makes for a scenario in which it seems more than fair to wonder where that next leg of growth in revenues and earnings actually will come from.

3M is rather important to the Dow Jones industrial average, which is why its earnings report could rock the index. The Dow is calculated as a price-weighted index rather than as a market cap weighted one, as seen in the S&P and other major equity indexes. To prove the point: the IndexArb.com website showed that 3M was the fourth highest weighted stock of the Dow, with roughly a 5.4% weight in the broader index. There were only three higher weightings were: Goldman Sachs (5.50%), UnitedHealth (7.35%) and Boeing (9.9%). As for how 3M is less influential in the S&P 500 with its modified market cap measurement, the $112 billion market cap makes it just the 45th highest weighting of the 500 companies in the index.

When 24/7 Wall St. ran its model of analyst figures calling for 28,000 on the Dow by late 2019, 3M was portrayed as in a position of pain in 2018, losing 19% of its value after having seen excessive gains of 31% in 2017.

One further issue making the 3M report harder for investors and analysts alike to evaluate is that the conglomerate corporate structure is no longer popular with investors at all. The multitude of moving parts makes it harder to understand what a company is doing as a whole, and it makes it harder to identify how problems in one unit might overwhelm gains in other units and vice versa.

3M dealt its investors some pain all on its own with guidance and the conference call after earnings later in 2018. The company still kept growing its dividend year after year, and the good news is that 3M is likely to keep raising that dividend ahead.

3M shares closed out 2018 at $190.54, and investors should pay attention to the notion that the $203.94 consensus target price at that time actually was lower than the consensus analyst price target a year earlier. If the analysts were correct at the start of 2019, they were calling for 3M shares to generate a gain of almost 10% for all of 2019, when including the 2.9% dividend yield.

3M ended 2018 valued at almost 21 times trailing earnings, but it was valued at just 17.6 times next year’s earnings estimate.

3M shares closed last Friday at $195.90, with a consensus price target of $202.79 and a 52-week trading range of $176.87 to $259.77. On last look, ahead of earnings, 3M shares were trading closer to $192.50 — just 1% higher than at the close of 2018. That is not very impressive, considering that the Dow had bounced a whopping 2,000 points from the lows seen on January 3, 2019.