3M's Results Aren't All That Comforting

(Bloomberg Opinion) -- Not many CEOs can cut guidance four times in one year and live to tell the tale, but that’s exactly the position in which 3M Co.’s Michael Roman now finds himself.

The maker of Post-it notes and automotive abrasives lowered its expectations for 2019 earnings and sales growth on Tuesday, just a little more than two months after setting those targets. 3M now expects to earn $10.45 to $10.90 a share this year, compared with a prior forecast for $10.60 to $11.05. A fair chunk of that guidance cut can be explained by the $1 billion acquisition of a health-care-focused artificial-intelligence business that 3M announced in December. But 3M also flagged a slowdown in China and automotive and electronics markets. It estimates 1 percent to 4 percent growth in sales excluding the impact of M&A and currency swings, with the middle of that range falling short of its previous outlook.

3M's Results Aren't All That Comforting

3M shares actually climbed on these numbers because they weren’t as bad as the market had feared, especially after Caterpillar Inc.’s weak guidance reignited fears of a global slowdown. Rockwell Automation Inc. is another industrial company that investors have loved to hate recently, given its exposure to the sputtering automotive and electronics markets. It, too, was rewarded for results that surprised on the upside. 

I would argue that 3M’s results should actually reinforce, rather than assuage, global growth concerns; the company is often viewed as a harbinger of momentum shifts in the industrial cycle and it just cut its revenue forecast less than one full month into the year. Regardless of where you fall on that spectrum, however, it’s clear that Roman should have been more conservative on 3M’s outlook. His projections for 2 percent to 4 percent organic growth this year seemed ambitious from the start, with the high end implying a faster pace of expansion than what 3M was forecasting for 2018. That just didn’t jibe with the economic data pointing to a cooling of manufacturing demand, or anything 3M itself had said over the past year.

3M's Results Aren't All That Comforting

Recall that 3M had to cut its 2018 earnings and organic-growth forecast last April, just a month after Roman reaffirmed the prior sales outlook. At the time, Roman was CEO-in-waiting so the blame for that miss lay more with his predecessor Inge Thulin and his curious decision to undermine the incoming boss’s credibility before he’d even started. Roman officially took the CEO job on July 1, and then later that month had to again chop 3M’s earnings outlook. Come October, both the organic sales-outlook and the EPS forecast were slashed yet again. 3M is a classically short-cycle company and has limited visibility into its future earnings. But this still just seems sloppy. Roman needs to learn the value of under-promising and over-delivering, and in a hurry.

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.

©2019 Bloomberg L.P.