3M Looks Good When You Break It Down By Segment

3M (NYSE:MMM) has taken center stage since the onset of the pandemic, with its N95 masks worth their weight in gold. Okay, the masks aren’t that valuable. But they have played a large role in slowing the spread of the coronavirus.

Demand has been so high for the masks that 3M hasn’t been able to keep up. On the Q2 earnings call, CEO Mike Roman said:

“In the first half of the year, 3M manufactured 800 million respirators globally with half distributed in the U.S., primarily to healthcare and FEMA. For the full year, we expect to produce 2 billion respirators globally, more than a threefold increase versus 2019. We continue to make investments and partner with the U.S. Department of Defense and other governments to bring additional global capacity online.”

Q2 was a similar story to Q1; a strong performance by the personal safety segment, which includes N95 masks, wasn’t enough to offset revenue and earnings decreases in 3M’s other segments.

But don’t miss the forest for the trees with 3M. The segments with the biggest short-term struggles will see improving performance, while the personal safety segment should see long-term gains.

Let’s start by looking at 3M’s overall results:

For Q2, 3M reported revenue that was down 12% yoy to $7.18 billion, falling short of expectations for $7.32 billion. Adjusted EPS dipped 16% yoy to $1.92 per share, also lower than consensus estimates of $1.81.

However, 3M expects Q3 sales to be $8.2 billion to $8.3 billion, up from $8 billion in Q3 2019, and above previous estimates of $8.08 billion.

The company has released its July and August numbers, which are up 6% yoy and 2% yoy, respectively. There’s no reason to expect a significant dip in September, so 3M should be able to realize its expectations for a yoy increase in Q3.

The segment-by-segment breakdown makes it easy to see why 3M is showing rapid improvement.

3M’s personal safety segment saw double-digit organic growth in Q2, which was of course, driven by demand in response to the pandemic.

The pandemic has shown signs of abating, but the virus won’t completely leave us for the foreseeable future, so 3M should continue to see elevated demand for its masks for at least the next six months.

Governments around the world were caught with their pants down when the pandemic broke out. The mask shortage was one of the biggest issues in the early stages of the pandemic, and it continues to be a problem.

Therefore, I see mask demand being elevated even after the pandemic ends, as governments stockpile masks in anticipation of future health crises.

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Two of 3M’s worst-performing segments in Q2 were Automotive OEM and Health Care.

The automotive OEM business was down 44% yoy in Q2, as there was a 45% decline in global car and light truck builds.

New car sales will likely be soft for the foreseeable future, but they will improve over time, even if they don’t reach pre-pandemic levels any time soon. Even if that 44% decrease turns into a 10-20% decrease, it would provide a significant boost to 3M’s overall results, compared to Q2.

The health care segment decreased by 12% organically yoy. 3M explained the decline by pointing to delays in elective procedures, noting that, “These impacts were most prevalent in our oral care business, which was down nearly 60%, and medical solutions, which declined mid-single digits in Q2.”

Here’s the deal:

Elective procedures should pick up over time as people adjust to the new-normal. On top of that, I don’t see people delaying elective procedures for long periods of time. There’s a big difference between delaying an elective procedure for a couple of months vs. a couple of years.

3M has been basing between around $147 and $170 per share over the past three-and-a-half months. The price action has tightened over the past month, and 3M looks like it could breakout in the near future.