Dow components 3M Co. MMM and Caterpillar Inc. CAT tumbled sharply in early market trading Tuesday on disappointing third-quarter earnings, driven primarily by higher operating costs.
St. Paul, Minnesota-based 3M reported net earnings of $2.58 per share for the quarter, underperforming the consensus estimate of $2.70. Likewise, Deerfield, Illinois-based Caterpillar reported net earnings of $2.86 per share, underperforming the consensus estimate of $3.01.
Dow trades over 500 points lower on ongoing geopolitical fears
The Dow Jones industrial average traded at an intraday low of 24,788.02, down over 500 points from the previous close of 25,317.41, as a result of ongoing geopolitical fears. CNBC columnist Fred Imbert said that the U.S. and China have “implemented tariffs on billions of dollars worth of their goods,” increasing company costs and accelerating fears of economic slowdown. Chief Market Strategist Art Hogan said the U.S. is “getting further away from a deal with China” and that negotiations have recently stalled.
Higher operating costs hurt Caterpillar’s earnings performance
Caterpillar reported $9.022 billion and $27.01 billion in costs of goods sold over the past three months and over the past nine months, up from $7.678 billion and $22.295 billion in the prior year. The higher operating costs primarily stem from higher manufacturing and freight costs.
Chief Financial Officer Andrew Bonfield said on the earnings call that although energy and transportation segment profits increased $230 million from the prior-year quarter on higher sales volumes, higher manufacturing costs and increased operating expenses offset strong sales. Manufacturing costs lowered operating profit by $205 million on higher steel costs and tariffs. Freight costs lowered operating profit by $77 million primarily due to supply chain inefficiencies and responses to strong global demand.
3M reports lower sales for the quarter, lowers full-year guidance
3M, a major manufacturer of well-known products like Scotch tape and Post-It notes, said net sales declined 0.2%, driven by lower sales in Health Care, Consumer, Electronics and Energy. Organic local currency sales declined 1.1% in Health Care and 2% in Consumer, the latter driven primarily by lower sales in stationery and office supplies.
Based on the declining sales, management lowered its full-year adjusted earnings outlook approximately 30 cents from its prior guidance range of $9.08 to $9.38 per share.
3M: Buy the dip?
3M and Caterpillar tumbled 7.42% and 8.83% from their respective previous closes following the earnings release. Despite this, GuruFocus ranks 3M’s profitability 8 out of 10 on several positive investing signs, which include consistent revenue growth, expanding operating margins and a strong Piotroski F-score of 7.
Gurus with large holdings in 3M include First Eagle Investment (Trades, Portfolio), Mairs and Power (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Disclosure: The author is long MMM.
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