We Lower 3M's FVE Because of Expected U.S. Tax Reform

Wide-moat-rated 3M MMM had solid second-quarter results. However, we lower our fair value estimate to $195 per share from $199 previously due entirely to our probability-adjusted U.S corporate tax rate of 26% beginning in 2022. Nonetheless, 3M turned in better-than-expected organic top-line growth, as our earnings and free cash flow projections moved higher, though our overall operating margin assumptions remained untouched. On the heels of this outperformance, management raised its EPS guidance range by 45 cents at the midpoint to $9.90, or good for just shy of a 5% raise. Management also tightened the EPS guide by a dime per share. Finally, management raised its full-year organic top-line guide by 3% to 7.5% at the midpoint.

We model just below that at 7.2%, of which only 40 basis points is thanks to price, in line with 3M’s historical experience, excluding electronics. We have a hard time believing 3M will manage to take price materially greater than this figure, particularly given the 10 basis point price-take observed during the second quarter. Nonetheless, there’s generally a couple quarter lag to take price, particularly since portions of 3M’s business is contractual, and it takes time for the firm to offset its raw material headwinds. For the second half, management is expecting that raw material and logistic-related headwinds persist and even exacerbate. The firm now expects between a 65 cent and 80 cent per share price-cost headwind versus the 40 cents or so prior. Nonetheless, we still see conservatism baked into the raised EPS guide due to management baking in a cushion on account of these headwinds. 3M should disproportionately benefit relative to the multi-industry category during this part of the cycle. More importantly, we see its long-term trends intact.

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