3M - Microsoft & Facebook Can’t Push S&P 500 Higher
Before getting into 3M, let's review MSFT and FB. Even though most firms have beat earnings estimates and Microsoft and Facebook soared on Thursday, the S&P 500 still fell 4 basis points. Those two certainly helped the Nasdaq as it increased 0.21%.
Russell 2000 and the Dow fell 0.79% and 0.51%. I mentioned the Dow because 3M’s worst daily decline since Black Monday in 1987 is the main reason it fell. 3M stock fell 12.95% which had a negative impact of 192 points on the Dow. It only fell 135 points on the day.
3M Reports Terrible Earnings
3M reported $2.23 in adjusted earnings per share which missed estimates by 26 cents. The firm’s $7.863 billion in revenue missed estimates for $8.025 billion.
As you can see from the chart on the right, overall revenues fell 5% yearly. In the last manufacturing recession, the trough in sales growth was -5.5%. In this quarter, sales in Asia Pacific fell 7.4% and sales in Europe, the Middle East, and Africa fell 9.4%.
Worst part of the report was that it lowered 2019 EPS guidance from $10.45-$10.90 to $9.25-$9.75. The firm announced plans to lay off 2,000 workers.
The CEO, Mike Roman, stated, “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.”
A key takeaway for investors who don’t own this stock is what this means for the global economy. It seems like 3M is underperforming its industrial pears. That being said, it’s not as if the manufacturing sectors in Europe and China were on fire in Q1.
3M - Starbucks Beats Earnings & Raises Estimates
Starbucks reported 60 cents in EPS which beat estimates by 4 cents. This pushed its stock up 1.06% after hours. It reported revenues of $6.32 billion which missed estimates by $10 million. Same store sales growth was 3% which beat estimates for 2.9%.
Net income increased marginally as it went from 660.1 million to $663.2 million. The best part of its report was that it raised non-GAAP 2019 EPS estimates from $2.68-$2.73 to $2.75-$2.79. Analysts expected $2.71 in EPS. Same store sales growth was driven by increased spending in stores. People bought premium beverages and purchased more beverages each time they went to Starbucks. Cloud Macchiato collaboration with Ariana Grande was described as the “second most viral Starbucks campaign ever.”
As you can see from the chart below, U.S. same store sales growth was 4%. This growth is a bit lower than where it has been most of this cycle. Best news from America is the firm’s loyalty program grew 13% to 16.8 million active members.
As you can see from the chart on the bottom left corner, traffic in China fell 1% due to competition with Luckin Coffee. Luckin Coffee aims to beat Starbucks by having easy pickup and convenience.
Starbucks certainly isn’t going down without fighting. The firm added delivery to 2,100 stores in China by partnering with Alibaba. By the end of the fiscal year, Starbucks will launch mobile order and pay. Starbucks will open 600 stores in China this year, while Luckin will added 2,500.
As you can see from the chart below, 46% of Luckin’s stores are within ¼ miles of at least one Starbucks. I’m nervous about oversaturation in an economy that is experiencing secular weakness. Starbucks had 3% same store sales growth in China.
3M - Amazon Beats Estimates
Amazon destroyed EPS estimates, but revenue growth slowed. EPS was $7.09 which beat estimates for $4.72. This caused the stock to increased 0.61% after hours. Revenues met estimates as they were $59.7 billion. AWS had $7.7 billion in sales which also met estimates.
As you can see form the chart below, revenue growth was only 16.9%. That’s one of the lowest growth rates since the expansion stared. It’s the slowest growth since Q1 2015. This chart looks like 3M’s. It supports the narrative of an economic slowdown in Q1 2019.
North American revenue growth was 17% which was down from last year’s 46% growth. International revenue growth was only 9% which was down from last year’s 34% growth. Advertising and Whole Foods aren’t doing well.
Advertising is in the ‘other’ category which saw 34% revenue growth to $2.7 billion. It grew at least 60% in the past 5 quarters. Physical store sales growth, mostly coming from Whole Foods, was 1% to $4.3 billion. Amazon’s cloud service which is losing share to Azure, had 41% sales growth which was down from last year’s growth of 49%.
While Amazon saw revenue growth slow substantially, net income of $3.6 billion hit a record high. Furthermore, operating profits of $4.4 billion represent margins of 7.4% which is a huge bump from 3.8%.
As per usual, the company reported operating profit guidance well below the consensus. Guidance was for between $2.6 billion and $3.6 billion which missed estimates for $4.2 billion. The firm is making a $800 million investment in free 1 day shipping for Prime subscribers.
Amazon’s Fire TV has 30 million subscribers which is more than Roku which has 27 million.
3M - Conclusion
Don’t oversimplify the data in this article to make broad generalizations about the economy.
For example, Starbucks might see slow growth in China in the next few quarters because of increased competition. Don’t take that to mean the Chinese economy is falling off a cliff. Personally, I wouldn’t buy Starbucks even after it raised guidance because of this competition.
I would buy 3M stock because of the 3.02% dividend and because I think the industrial sector will recover in the next year. After this huge decline in the stock, its operational weakness is priced in. I’d rather own Microsoft than Amazon because of Azure.
Investors in Amazon were betting on this type of margin expansion for years. It’s here now, but that’s not a reason to buy the stock. With its big slowdown in revenue growth, it could be at the start of its transition from a growth stock to a GARP (growth at a reasonable price) stock.
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