3M Had Sluggish Q2; We Lower FVE Slightly

After reviewing wide-moat-rated 3M’s MMM latest second-quarter 2020 results, we slightly lower our fair value estimate by about 2% to $166 per share (from $170 previously). Nothing materially changes in our long-term outlook. That said, a couple of items caused us to adjust our near-term outlook. We slightly lowered our top-line assumptions to $31.6 billion from $32.0 billion. While the tweaks were broad-based, one item we call out is oral care, which has been hit hard given coronavirus' impact on elective procedures. Clearly, given pandemic-related closures, global dental offices were frequently closed during the second quarter and have yet to fully recover based on some informal channel checks in the United States. That said, oral care has never been a big part of our thesis, and it’s possible this is a business division that could eventually be spun out (we suspect this is a price competitive business given the number of portfolio sales from other competitors). Portfolio reviews are a part of 3M’s strategy, and the company has acted to sell most of drug delivery and other business divisions over the past year.

Margins, however, were a bigger driver of our fair value decrease. Specifically, we did lower our healthcare segment margins materially by approximately 500-basis points for full-year 2020, though admittedly we were slow-footed to do so last quarter. We were clearly way off in our original assessment. While we anticipated the dilutive effects of the Acelity acquisition, which was baked into our forecast, we did not fully appreciate the effect of loss volumes on margins in that segment (management pointed out that net-net, mix had very little to do with the margin headwinds). Health care margins fell a resounding 10 percentage points year over year to 16.8% on a reported basis. About a third of that quantity was related to the Acelity acquisition, with the remaining two related to decline in organic sales.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.