On April 8, Zacks Investment Research downgraded industrial goods manufacturer 3M Company (MMM) to a Zacks Rank #3 (Hold) from a Zacks Rank #2 (Buy) on the heels of downward estimate revisions.
Despite the downtrend, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 18.0x with long-term growth expectations of 11.3%.
Why the Downgrade?
Over the last 7 days, most of the earnings estimates for 3M have been revised downward for first quarter 2014 as well as for the full year. This seems to be an aftereffect of a slightly bearish outlook for the ongoing quarter.
The downward earnings estimates are largely a function of uncertainties in the current macroeconomic environment, which can adversely affect the company’s earnings growth as well as margins. Despite an above-average sales growth and solid share buybacks, limited upside margin potential will take away that advantage over its peers.
In addition, raw material inflation, higher R&D expense and increasing competition are some of the other concerns. 3M’s growth objectives also depend on market timing and acceptance of new product offerings, including its ability to continually refresh its product suite and bring those to the market at acceptable price points. This makes 3M vulnerable to market risks. The company also faces fierce local competitive pressure, specifically in the emerging markets. Establishing local operations are likely to hurt its profitability to some extent due to continuous investments in value drivers that are inevitable to fend off competition.
Other Stocks to Consider
Stocks that look promising and are worth looking into now include CLARCOR Inc. (CLC), Crane Co. (CR) and Bunzl plc (BZLFY), each carrying a Zacks Rank #2 (Buy).
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