3M Earnings: Misfire Threatens New CEO Honeymoon Before It Starts

(Bloomberg Gadfly) -- It's trial by fire for 3M Co.'s CEO-in-waiting.

The maker of everything from Post-it notes to teeth polishers on Tuesday cut its 2018 earnings and organic growth forecast after a disappointing first-quarter operating performance. That's jarring because Chief Operating Officer Michael Roman, who will succeed Inge Thulin as CEO in July, just last month reaffirmed 3M's call for a 3 percent to 5 percent boost in core sales, even as he tamped down expectations for the first quarter. It's a sharp contrast to the brightened outlooks from Honeywell International Inc. and United Technologies Corp., which also reported earnings on Tuesday. I mean, even General Electric Co. kept its 2018 targets intact (for now.)

First-quarter earnings per share at 3M were roughly in line with analysts' reduced expectations, but that's largely because of the benefit of a lower-than-expected tax rate. RBC analyst Deane Dray flagged a miss in operating profit for the health-care and consumer units and higher-than-anticipated corporate and interest costs. The company’s position as a supplier to other industrial companies and a seller of consumer goods often makes it a leading indicator of trends to come. Its latest struggles will raise questions about the durability of accelerating industrial growth and that of the broader economy.

3M attributed its weakened organic sales outlook to a slow start in the automotive after-market. Faltering demand for smartphones, which has an impact on the display materials the company provides for that industry, is also a factor. Energy-related sales declined 2 percent in the first quarter.

The challenges in the automotive market may raise a new set of questions about the competitive threat posed by Amazon.com Inc. Investors had previously been concerned about price pressure in 3M's consumer business from the internet giant. But Amazon has also been pushing into sales of automotive parts and accessories, as well as industrial distribution. Meanwhile, 3M stands to get caught in the cross hairs of a potential trade war with China. The company gets about 10 percent of its revenue from the country and is a net exporter from the U.S., according to Dray.  

That said, 3M is still growing and saw gains in all of its main businesses. The sky isn’t falling. The bigger takeaway for 3M in particular may be a question of credibility. Roman has been caught in a tangle of overpromising and under-delivering before he's even officially ascended to the CEO job. That's not really his fault. There’s a reason companies use outgoing CEOs to deliver bad news and take the blow for misplaced optimism. You want to give new leaders a fresh slate. Maybe someone at 3M should have thought about that. 

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

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