What happened
Shares of industrial giant 3M (MMM 0.59%) fell by 16.5% in the first half of 2023, according to data provided by S&P Global Market Intelligence. While the move is bad enough, it's even worse compared to the 15.9% increase in the benchmark S&P 500 index.
When analyzing a company's performance, investors often look into three interconnected buckets (operational, end markets, and administrative) to judge matters. Unfortunately, 3M delivered disappointing news on all three fronts in the first half.
Key Data Points
On the operational side (how a company competes in its end markets), 3M opened the year by reporting that it missed its revenue growth estimate in the fourth quarter of 2022. On the earnings call in January, CEO Mike Roman said, "We posted organic growth of 0.4% versus our expectation of 1% to 3%."
It gets worse. Investors were left underwhelmed by management's guidance for full-year organic sales growth to be in the range of a 3% decline to flat versus 2022.
3M's end markets also appear to be weakening in 2023. Roman referred to "rapid declines in consumer-facing markets, such as consumer electronics and retail," as the company exited 2022. These weak conditions continued in the first quarter, with Roman noting "ongoing weakness in consumer-facing markets" on the earnings call in April.
In a nutshell, 3M is being hit by weak consumer discretionary spending in its consumer-facing segment and its industrial businesses, such as closure and masking systems, that sell to the consumer. Moreover, chief financial officer Monish Patolawala said that 3M's full-year guidance "assumes overall recovery in all economies in the second half, including China," and given that China's recovery hasn't been quite as strong as many hoped it would be, 3M's end markets are far from ideal in 2023.
Lastly, 3M's restructuring plans received a blow when one of its key executives, Michael Vale, was dismissed after being promoted to play a crucial administrative role in those plans only a few weeks earlier.
Image source: Getty Images.
So what
These disappointing developments matter mainly because they come from a company whose management has struggled to meet its financial guidance over the years.
In addition, the company still faces potentially significant legal liabilities from using certain chemicals, and even its much-vaunted dividend might not be sustainable under the worst scenarios.
Now what
As difficult a year as it's been for 3M, the stock still has much going for it. The valuation looks attractive, and a 6%-plus dividend yield is appealing.
That said, it might make more sense to monitor the stock to see if management can start consistently hitting its own guidance before buying in and, at the least, address the trend of margin decline at the company. Until those things happen, it's probably one for the monitor list.
