3M Is Down ~8% After A Shocking Earnings Miss
Perhaps the most surprising story from this mornings’ earnings release is from 3M Company (MMM), the diversified industrial manufacturing giant that makes products ranging from Post-It Notes to safety equipment and seemingly everything in between.
In this morning’s earnings release, the company made a number of troubling announcements:
- Sales of $7.9 billion declined 5% year-on-year
- Sales declined by double-digits in the China, automotive, and electronics divisions
- Adjusted earnings-per-share of $2.23 declined by 10.8% over the same period in fiscal 2018
Here’s what the company’s Chief Executive Officer, Mike Roman, had to say about 3M’s performance in the quarter:
“The first quarter was a disappointing start to the year for 3M. We continued to face slowing conditions in key end markets which impacted both organic growth and margins, and our operational execution also fell short of the expectations we have for ourselves. As a result, we have stepped up additional actions – including restructuring – to drive productivity, reduce costs, and increase cash flow as we manage through challenges in some of our end markets.”
The ‘restructuring’ mentioned in the quote above refers to a business group realignment from five to four business groups. In conjunction with this realignment, 3M announced an expectation reduction of 2,000 positions worldwide. For context, the company currently has approximately 93,000 employees.
Lastly, 3M announced revised guidance for the full fiscal year. The company now expects to generate adjusted earnings-per-share between $9.25 and $9.75 versus a prior expectation of $10.45 to $10.90. 3M also updated its organic local-currency sales growth guidance to be in the range of minus 1 percent to plus 2 percent versus a prior range of 1%-4%.
Overall, 3M’s performance in the first quarter of 2019 was shockingly bad. With that said, 3M remains one of the highest quality manufacturing stocks around; as well as one of the most shareholder friendly. 3M has paid increasing dividends for more than 50 consecutive years, making it a Dividend King. We don’t see this streak stopping any time soon.
Prior to this release, we had a hold rating on the company, but this may change to a buy if the company’s reaction to this earnings release causes the stock to fall enough that its valuation becomes attractive.
AbbVie: A Double Beat For This Pharma Giant
AbbVie (ABBV), the biopharmaceutical company that was spun off from Abbott Laboratories in 2013, also reported earnings this morning.
AbbVie’s business has performed remarkably well since the spinoff, but its stock has lagged because of fears surrounding the patent expiration of its flagship drug Humira – which contributed 57% of the company’s revenue in the first quarter and is he highest-grossing drug in the world . This drug’s patent expiration will increase the competition it experiences and make business much tougher for AbbVie.
But Abbvie continued to perform remarkably well in the first quarter. Here are the highlights:
- Adjusted diluted earnings-per-share of $2.14 increased by 14.4%
- Net revenues of $7.828 billion increased by 0.4% (excluding the impact of foreign exchange)
- In the U.S., Humira revenues increased by 7.1%. Internationally, Humira revenues declined by 23.0% (excluding foreign exchange) due to increased biosimilar competition
- Global net revenues from the hematologic oncology portfolio were $1.12 billion, an increase of 43.2% (excluding foreign exchange). Flagship drug Imbruvica net revenues were $1.0 billion, an increase of 34.0%
AbbVie beat consensus analyst expectations on both the top and bottom lines. Moreover, the company announced an increase to its 2019 financial guidance. AbbVie now expects to generate adjusted diluted earnings-per-share of $8.73-$8.83, which represents annual growth of 11.0% at the midpoint.
Overall, AbbVie’s performance was much better than we expected. The company’s high yield, shareholder-friendly capital allocation, and cheap valuation allows it to earn a strong buy recommendation from Sure Dividend at current prices.
Microsoft: A Cloud-Driven Earnings Beat
Yesterday after the market closed, Microsoft (MSFT) reported earnings for the third quarter of fiscal 2019. In the quarter, revenue of $30.6 billion increased by 14% while operating income of $10.3 billion increased by 25% and net income of $8.8 billion increased by 19%. The bottom line was similarly strong as diluted earnings-per-share of $1.14 increase by 20% over the third quarter of fiscal 2018.
Microsoft’s cloud business continues to be its best-performing segment. Server products and cloud services revenue increased by 27% (or 29% in constant currency) driven by Azure revenue growth of 73% (or 75% in constant currency).
Microsoft also returned $7.4 billion to shareholders through a combination of dividend payments and share repurchases in the quarter.
On Microsoft’s conference call, the company also provided guidance for both Q2 and the remainder of the fiscal year. For the twelve-month reporting period, Microsoft expects double-digit percentage growth in both revenue and operating income . While not explicitly stated, we believe Microsoft is also highly likely to grow earnings-per-share at a double-digit rate as well.
Microsoft’s recent financial performance has been very impressive; however, the company’s valuation is higher than we’re comfortable with. Accordingly, Microsoft earns a hold recommendation from Sure Dividend at current prices.
Visa: Following Microsoft To An Earnings Beat
At the same time that Microsoft was announcing its strong performance for the second quarter of fiscal 2019, Visa (V) reported results for the same time period.
Visa announced that net revenues of $5.5 billion increased by 8% year-on-year, net income of $3.0 billion increased by 14% year-on-year, and earnings-per-share of $1.31 rose by 17%.
Visa’s business drivers were diversified and the company appeared to perform well across its entire organization. The payments conglomerate reported that payment volume rose 8% year-on-year, cross-border volume increased by 4%, and processed transactions rose by 11% over the same period a year ago.
With the publication of its strong second quarter results, Visa modified its guidance for the full fiscal year. The company expects net revenues to grow at a low double-digits pace while earnings-per-share are expected to grow at a high-mid-teen percentage pace.
Overall, Visa’s performance continues to be among the best in the publicly-traded stock universe. However, the company is trading significantly above our fair value estimate, so it earns a hold recommendation from Sure Dividend at current prices.
Altria: Costs Weigh On Q1 Performance
Earlier this morning, Altria (MO) reported financial results for the first quarter of fiscal 2019.
On the surface, the quarter was not very strong. Net revenues declined by 7.9% while revenues net of excise taxes declined by 6.0%. Further down the income statement, GAAP diluted earnings-per-share declined by 40% while adjusted diluted earnings-per-share declined by 5.3%.
While the headline figures are disappointing, some color from the management team shows that Altria’s performance was actually in-line with expectations. Here’s what the company’s Chairman and Chief Executive Officer, Howard Willard, said about the company’s performance in the quarter:
“As expected, Altria’s first quarter adjusted diluted EPS declined in the mid-single digit range as we incurred higher interest expense as a result of our recently issued debt, without the full benefit of savings from our cost reduction program, which began to ramp up at the end of the quarter. We continue to expect full-year adjusted diluted EPS growth of 4% to 7%.”
Overall, we continue to believe that Altria looks attractive thanks to its high dividend yield and cheap valuation. The company currently earns a buy recommendation from Sure Dividend at current prices.
Ameriprise Financial: Strong Performance Led By Share Buybacks
Ameriprise Financial (AMP) also beat earnings estimates after announcing its results yesterday after the market close. The company’s revenue was roughly flat year-on-year, but its other metrics were better.
The company’s adjusted operating earnings per diluted share (its preferred metric for per-share performance) increased by 8%. Ameriprise Financial also operated with an adjusted operating ROE of 36.4%.
Here’s what the company’s Chairman and Chief Executive Officer, Jim Cracchiolo, said about the company’s performance in the quarter:
“Ameriprise delivered a solid quarter led by double-digit earnings growth in our Advice and Wealth Management business. Overall, I’m pleased with our results given at the beginning of the year markets drove lower fee levels and muted client activity. As volatility settled, client activity returned to historical levels in line with what we expected. We ended the quarter with strong Ameriprise client net inflows and steady growth in advisor productivity.”
Ameriprise Financial continues to allocate capital in a very shareholder-friendly manner. Through an aggressive buyback program, the company reduced its shares outstanding by a remarkable 7.9% year-on-year in the most recent quarter.
The company’s dividend history is also indicative of a shareholder-friendly management team. With the publication of its first quarter earnings release, Ameriprise Financial increased its quarterly dividend by 8%. This represents the company’s twelfth dividend increase during the last ten years.
Ameriprise Financial’s combination of a cheap valuation, strong growth prospects, and reasonable safety metrics (it earns an A rating for Dividend Risk) causes it to earn a strong buy recommendation from Sure Dividend at current prices.