3M Faces Wall Street ‘Penalty Box’ as Pressure Builds on New CEO

(Bloomberg) -- 3M Co. just suffered its worst one-day loss since Black Monday more than 31 years ago. Now the real difficulty begins.

The stock faced multiple downgrades and target-price reductions Friday after a grim earnings report revealed deep problems plaguing the economic bellwether. Following the historic selloff, 3M faces a prolonged recovery as it tries to repair its operations and regain investor confidence.

“3M may be stuck in the penalty box for a while,” Deane Dray, an analyst with RBC Capital Markets, said in a note as he trimmed his price target.

3M Faces Wall Street ‘Penalty Box’ as Pressure Builds on New CEO

The blue chip company tumbled into crisis this week as it acknowledged a confluence of operational missteps and deteriorating markets that are weighing on profit this year. 3M cut its annual forecast for the second time this year, shaking its reputation for steady results and raising questions about management less than a year after Michael Roman took over as chief executive officer.

3M was little changed at 10:26 a.m. in New York. After Thursday’s 13 percent decline, the shares have lost virtually all of their gains for 2019.

Earnings Miss

Profit in the first quarter missed Wall Street’s estimates as operating income fell in all five business units. Roman pointed to weakness in the automotive and electronics markets -- two areas that have been a drag on 3M for multiple quarters amid flagging demand for cars and smartphones -- as well as a slowdown in China. 3M makes a variety of products supporting those industries, including tapes, adhesives and filtration materials.

The company’s problems were partly self-inflicted, as 3M said it failed to adjust its cost structure quickly enough. Though it cut production almost 5 percent in the face of weak demand, 3M was able to reduce expenses by only about 1 percent.

3M Faces Wall Street ‘Penalty Box’ as Pressure Builds on New CEO

“It’s as much internal as it was external,” said Nicholas Heymann, an analyst with William Blair & Co. It may take “several quarters” to get on track, he said. “They can’t adjust their operating system when the global economy or overseas markets suddenly shift.”

Analysts at Bank of America Merrill Lynch and Argus downgraded the shares to the equivalent of hold from buy.

Cutting Costs

3M announced a restructuring plan to improve operations, including 2,000 global job cuts, that the company expects will save as much as $250 million annually.

With yet another reduction to the profit forecast and broadly weak results, Roman told investors on a conference call Thursday that “we have to rebuild our credibility.”

The stumbles are reminiscent of past CEO transitions at 3M, according to Scott Davis, an analyst with Melius Research. It’s tough to blame Roman since he inherited many of the current issues, including heavy exposure to certain markets that were beginning to soften, Davis said.

Still, the new CEO’s presentation on Thursday was light on details and lacked the “fire in the belly” that employees and investors may want to see from a company with so many issues to address, the analyst said.

“Shareholders expect better and 3M has to tighten up its forecasting abilities, cost execution and do a much better job on the quarterly conference call,” Davis said in a note. “3M has a lot of potential. But now it’s a show-me.”

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