3M Spoils the Industrial Growth Party
(Bloomberg Opinion) -- Just when you thought it was safe to store away your slowdown fears until the next earnings season, 3M Co. is bringing back the doom and gloom.
The company slashed its 2019 guidance on Thursday amid declines in the automotive and electronics markets and weakness in China. 3M now expects to earn at most $9.75 a share this year after backing out environmental litigation charges, compared with a previous forecast for as much as $10.90. Sales could fall 1 percent this year after backing out the impact of M&A and currency swings. The company will cut 2,000 jobs and embark on a restructuring program in a sign that it doesn’t expect a quick recovery.
Industrial investors had seemingly decided worries about a peak in growth and profits were overblown, aided by impressively robust and well-rounded results out of Honeywell International Inc. and United Technologies Corp. Consider that 3M was up about 15 percent year to date heading into its earnings report despite lowering its outlook in January. Thursday’s guidance cut — the fifth for 3M in only a year — brought a dose of reality.
Again, the economy isn’t falling off a cliff, and the pain seems fairly isolated to the areas that are giving 3M the most trouble. But there are some signs that it’s spreading, particularly in products with shorter sales cycles that are more vulnerable to shifts in demand. In addition to trouble with China, automotive and electronics, 3M noted inventory adjustments in its sales channels for industrial markets, a comment that’s likely to drive concerns about a broader destocking of goods in the face of weaker demand. 3M also reported a 0.4 percent drop in organic sales in the U.S. amid revenue declines in not only its industrial unit, but also its safety and graphics division and its health-care businesses. 3M cited sales drops for industrial adhesives and tapes, aerospace, roofing granules and commercial facility operations, among other things. Industrial distributors W.W. Grainger Inc. and MSC Industrial Direct Co. earlier in the earnings season had warned of moderating demand, and most of their customers are in the U.S.
That makes Honeywell look appropriately wise for being conservative with its guidance for organic sales growth in the second half of the year. “We don’t see any signs of problems, but we’re planning cautiously for the second half because short cycle can turn very, very quickly,” CEO Darius Adamczyk told Bloomberg Television earlier this week. If 3M is any guide, it may already be turning. To some extent, that’s just bad luck for CEO Michael Roman, who officially took over in July. The nature of 3M’s business makes it notoriously hard to forecast. But that just raises even bigger questions about why Roman laid out such ambitious targets for 2019 to begin with. His initial forecast for 2 percent to 4 percent organic sales growth now looks laughably aggressive. Investors don’t tend to have a lot of patience for such a consistent string of misses. Roman could learn a few things from Honeywell.
Elsewhere, Rockwell Automation Inc. also cut its earnings and organic sales guidance, citing a sputtering automotive market. The company reported growth in all geographic regions in its fiscal second quarter, but the pace slackened sequentially in both Asia and North America. You could make the argument that Rockwell’s issues are more isolated, but the extent to which the automotive market is able to influence the company’s results undermines some of its argument that its efforts to diversify have helped reduce its vulnerability to economic swings. Despite a 10 percent slump in automotive markets in the previous quarter, Rockwell was still able to notch roughly 6 percent organic sales across the entire company and 7 percent growth on the same basis for its Logix control platform. In the most recent quarter, Logix sales declined and organic growth for the company as a whole slowed to 3.6 percent.
The aggressive sell-off in December in industrial stocks has since been dismissed as a misreading of economic winds. Maybe it wasn’t wrong, just early.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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