Shares of 3M (MMM) are under pressure on Tuesday after RBC Capital analyst Deane Dray downgraded the stock to Sector Perform as he expects the overhang on the shares from macro pressure and litigation to persist. Further, he believes 3M’s reputation as a defensive, high-quality industrial is "eroding."
MOVING TO THE SIDELINES: In a research note to investors, RBC Capital's Dray downgraded 3M to Sector Perform from Outperform and lowered his price target on the shares to $176 from $207, as he expects the overhang on the shares from macro pressures and litigation to persist. After an "unsettling string" of guidance cuts, 3M's reputation as a "defensive, high-quality industrial is eroding," he contended, adding that the PFAS litigation remains an "unquantifiable risk" that is likely to worsen as the product liability class actions escalate. Dray also sees risk of more guidance cuts from 3M as well as limited capital allocation catalysts.
The stock has been the worst-performing large cap Multi-Industrial year to date, and investor sentiment has turned increasingly negative as the company stumbled through four guidance cuts in the past five quarters, he contended, pointing out that he believes guidance has still not been fully de-risked. Dray still sees weakness in China, auto, and electronics persisting, while management tempers "Street expectations at recent conference presentations." Furthermore, the analyst believes that the 2019 organic growth target of (1%)-2% needs to be trimmed further, and that 3M may also need to cut its optimistic 2019-2023 organic growth target of 3%-5%. Admission of execution issues in the first quarter has added to the fallout, he noted.
'SIMILAR GROWTH PATTERN' IN SECOND QUARTER: While presenting at the UBS Global Industrials and Transportation Conference back in early June, 3M CFO Nicholas Gangestad said that the company is not planning to change from being an annual guider to a quarterly but that "given where we were in the first quarter, we think it's prudent that we just give even clearer direction of what we're seeing in the current quarter." He added that, given what has been seen since April, "it would not surprise us if we see a continuation of a very similar growth pattern that we saw in the first quarter. First quarter down organically, negative 1% and it's very likely we could see growth similar to that in the second quarter [...] We've also talked about earnings per share we're expecting in the second quarter. We anticipate that our underlying core business operations will deliver EPS very similar to what we had in the first quarter. First quarter EPS was $2.23, and we think the underlying quarter will be very similar. But on the top of that, we've also announced in April a restructuring charge, and so we anticipate approximately a 20c charge that we'll be taking in the second quarter that will also impact our second quarter results, and that earnings per share -- that impact of that roughly 20c restructuring charge -- is encompassed in our full year guidance of EPS that we've laid out."
PRICE ACTION: In late morning trading, shares of 3M have dropped over 2% to $165.15.