<p>3M Co, with “MMM” as Bloomberg ticker, slumped more than 6% yesterday after cutting its earnings guidance for the year.</p><p> </p><p><b><span style="text-decoration: underline;">Tepid guidance for 2018</span></b></p><p>For 1Q 2018 results, 3M announced a slow start with EBIT at US1,904m, missing expectations of $2,010m. EPS was at $2.50, just in-line with consensus estimates.</p><p> </p><p>The major disappointment was the cut to the top-end of both its 2018 earnings and revenue growth outlook to $10.55 and 4% respectively. Prior guidance were $10.70 and 5% for earnings and revenue growth. After the adjustment, the 2018 EPS and revenue growth guidance is expected to be at $10.2 - $10.55 and 3 – 4% respectively.</p><p> </p><p>The company attributed its soft earnings outlook due to weaker demand for automotive and oral care products. In addition, inflation costs from higher raw materials and oil prices are expected to hurt gross margins.</p><p> </p><p><b><span style="text-decoration: underline;">Impact from Trade war</span></b></p><p>3M is a mega-cap company with a solid franchise in a broad portfolio of products such as Post-it notes and food safety products. The company is widely admired for its ability to harness technology to achieve high margins. However, it faces an upcoming threat from a potential trade war between US and China. More than 30% of its sales is from developing markets, with China comprising 10% of the company’s revenue. Further, the bulk of its Electronics &amp; Energy business is from Asia and this is closely linked to Asian economic growth. Therefore, a full-blown trade war could be disruptive to 3M’s growth outlook.</p><p> </p><p><b><span style="text-decoration: underline;">Difficult handover</span></b></p><p>Current CEO, Inge Thulin, will be replaced by Michael Roman in July. Roman is a 3M veteran, having served as COO in the company.</p><p> </p><p>The reduced sales guidance could dent investor’s confidence in Roman. This is after he has affirmed the 3-5% sales growth as recent as a month ago. Going into the earnings announcement, there were high expectations for the company. Instead, Roman fronted the announcement of bad news in the form of weaker guidance. While the guidance cut is small, a bad perception could be set of Roman as one who overpromise and under deliver.</p><p> </p><p>The slump in 3M’s share price has been sharp. Definitely, more reflection for the new CEO to go Mmm…</p><p> </p><p><b>Edmund Chan, CFA</b></p>