3M Earnings: Midpoint of Guide as Stretched as a Rubber Band, but Lower End Still in Play

After reviewing wide-moat-rated 3M’s MMM first-quarter results, we slightly lower our fair value estimate to $127 from $131. While the market was initially pleased with results, we’re of the view that the organic sales guide for the year seems like a tough hurdle to cross. Consequently, we bumped down both our adjusted revenue forecast for full-year 2023 (by about $400 million) to $31.4 billion and our adjusted EPS (by 4 cents) to $8.64.

During the quarter, adjusted revenue declined by nearly 10% to $7.7 billion, or nearly 6% on an organic basis. Adjusted operating margins declined by 410 basis points to 17.9%. We knew the front half of the year was going to be tough, but we’re still expecting material sequential improvements by the back half. These expected improvements are out of the ordinary relative to 3M’s historical trends. We’re hoping to see better macroeconomic output in China, continued healing of supply chains, and some self-help from productivity and working capital improvements.

Healthcare was the one bright spot in terms of organic top-line growth during the quarter, as it grew 1.4% year on year thanks to medical solutions and oral care. Yet, healthcare’s segment operating margins still declined 300 basis points. Nonetheless, we were somewhat happier with its performance relative to the rest of the portfolio, since elective procedure volumes are still about 90% of pre-COVID-19 levels, as expected. Management is calling for improvements to elective procedures for the balance of the year. We’re mostly skeptical of this claim, however, as we’d expect patients will exercise greater conservatism with how their dollars are spent given looming recessionary fears and competing priorities.