Market Overreacting to 3M's Poor Results

Joshua Aguilar:

3M's results were a little disappointing today, which prompted management to reduce both top-line and EPS guidance for the remainder of the full year. That said, we're not expecting a material change to our fair value estimate of $193. We've long been on the on

end of the range of price targets against our counterparts on the street. We see the stock's 7% dip as an overreaction to the news. We continue to view 3M as a high-quality, well-run company with about a 3% dividend yield. However, it's also a firm with more reserved growth opportunities across its addressable markets.

Looking at its segments' most recent results, it's a bit of a tale of two cities. The firm's healthcare segment saw organic revenue decrease over 1% year over year, primarily

a tough comp from last year's third quarter, as well as a slowdown in drug delivery. We're really not too concerned, as drug delivery is a project-based business which is tied to the pharma industry's regulatory cycle.

We're also looking forward to

about what’s in the pipeline when 3M presents at its investor day next month. Incidents of respiratory disease

on the rise across the globe, so over a five-year period, we think there are still promising prospects with 3M's products like the electronic inhaler. The inhaler monitors and regulates a patient's use of his or her inhaler and sends the data back to an attending physician. So there are promising long-term prospects in projects like these.

Safety and graphics

, grew 7%. Only 2% of that was organic, but Scott Safety made up the difference, and the acquisition is tracking ahead of expectations. We see the personal protective equipment market as an important driver of long-term growth for the firm, and we expect this business can grow top line at strong mid-single digits CAGR over a five-year cycle. Secular drivers here include stringent government regulations regarding the use of this type of equipment, as well as growing awareness

worker safety around the world.

On balance, 3M continues its trajectory as a company with over 20% returns on invested capital and 100% free cash flow conversion. We ultimately believe that should benefit shareholders in the form of both buybacks and dividends.