Stock Analysis: Can 3M Company (MMM) beat supply chain woes, cost pressure?

3M Company (NYSE: MMM) has emerged as a pandemic winner, aided by a sharp increase in the demand for its personal protective equipment and other safety/care products after the virus outbreak. However, the diversified industrial conglomerate has been sending mixed signals though it made a quick recovery from the initial slump.

Investing in MMM

The Minnesota-headquartered firm’s stock rose soon after last week’s earnings announcement, but it pulled back in the following sessions as the management’s cautious guidance weighed on investor sentiment. Though MMM is likely to come out of the slowdown in the coming months, the persistent market uncertainty calls for caution. So, it makes sense to put buy/sell decisions on hold for the time being and wait until the picture becomes clearer. That said, the long-term prospects look encouraging for the company, which has an impressive dividend history marked by regular hikes.

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Read management/analysts’ comments on 3M’s Q3 2021 earnings

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The supply chain issues and semiconductor shortage continue to be the main challenges facing 3M, though the management has adopted measures to deal with the situation. Going forward, the company might find it difficult to procure raw materials; and even if it manages to get the items, they would come at a high price.

High Input Costs

The bottom-line performance has been hit by high input costs, especially those related to raw materials. Since the only effective solution is to increase prices, the management is exploring that possibility but it could have a negative impact on sales. Also, there are concerns that the momentum in the sales of COVID-related products might not be sustainable in the long term, for obvious reasons.

We are taking multiple actions to help offset inflationary pressures including price increases, dual sourcing, and improving factory yields with more work to do. Ultimately, the duration of these supply chain challenges is difficult to predict. We remain focused on serving customers, managing backlogs, and making good on our commitments, delivering the unique high-quality products that are the hallmark of 3M.

Michael Roman, chief executive officer of 3M

3M’s key strength is its broad portfolio, with products ranging from building materials to tools and medical products to office supplies, which helps it stay resilient to unexpected events like the coronavirus outbreak. The company owns a number of leading brands like Scotch, Post-it, Command, and ACE, which are distributed through both retail and wholesale channels.  When it comes to market share, it competes with peers like Honeywell International Inc. (NASDAQ: HON) as well as the likes of General Electric Company (NYSE: GE).

Cautious Outlook

Earnings topped expectations in each of the trailing five quarters. At $1.43 billion or $2.45 per share, net profit was almost unchanged year-over-year in the September quarter but it came in well above analysts’ prediction. Net sales increased 7% annually to $8.9 billion and beat the Street view, supported by broad-based organic growth. Meanwhile, the management lowered its full-year earnings guidance and narrowed the sales growth target range to 9-10%.

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3M’s shares opened Tuesday’s session at $178.53 and traded slightly higher in the afternoon. It has gained 8% so far this year but experienced high volatility.  The shares have been trading below the 52-week average for nearly two months.