3M's Short-Cycle and China Weakness Continues

Wide-moat-rated 3M’s MMM fourth-quarter and full-year 2019 were relatively in line with our expectations for revenue and adjusted EPS, and exceeded our expectations for free cash flow (cash flow from operations less reported capital expenditures), albeit from a far reduced prior outlook relative to the start of 2019. That said, its 2020 outlook continues to disappoint, although we’re not surprised by these dynamics given continually weak auto build data we surveyed at the close of 2019 (which, per our last review, is expected to remain flat).

Looking at the quarter, segment revenue growth was mostly in line with our expectations. 3M’s health care segment remained solid, with fourth-quarter revenue up 25.4% year over year (roughly flat on an organic basis). Revenue growth in the segment was largely driven by the acquisitions of Acelity and M*Modal. However, the balance of 3M’s segments continued to experience end-market weakness in autos, electronics, and in China. Given its auto and consumer electronics exposure, transportation & electronics was unsurprisingly the weakest among all the segments, declining 5.9% year over year on an organic basis. Safety & industrial declined by 2.8%, and the consumer segment stayed roughly flat year over year.

While auto build data looks like it will remain stagnant for the year, we believe consumer electronics data that we’ve surveyed from Gartner indicates this market will have some rebound in 2020. Despite near-term weakness, we continue to be optimistic in our long-term forecast. Therefore, we don’t expect to materially change our $177 fair value estimate. However, we will reassess all assumptions after we roll our model for the 10-K filing.

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