If one steps back from the adjusted, non-GAAP EPS "beats" reported by companies this earnings season which benefit from what is set to be a record quarter of stock buybacks and an unprecedented drop in consensus expectations, Q1 earnings season for the "blue chips" so far has truly "blown", with revenue declines announced at IBM (12th in a row), McDonalds, Coke, and earlier today Procter & Gamble also reporting [6]that its sales have fallen for fifth straight quarter. And then moments ago "diversified global tech" bellwether 3M reported that its sales declined 3.2% year-on-year to $7.6 billion. The company also missed its EPS, and adding insult to injury, "the company now expects earnings to be in the range of $7.80 to $8.10 per share versus $8.00 to $8.30 per share previously."
Why? Blame the soaring dollar which is taking away from US corporate profitability and giving to European, Japanese and any other geographic region that is actively crushing its currency. That, and the fact that there continues to be no global recovery (thanks Chinese hard landing).
From the company:
“We are executing well against a more challenging economic backdrop in early 2015,” said Inge G. Thulin, 3M’s chairman, president and chief executive officer. “The stronger U.S. dollar negatively impacted sales and earnings in the first quarter, and global economic growth was mixed. Despite these near-term challenges, we grew organically in all business groups and all geographic areas, and expanded operating margins by nearly a full percentage point.”
Surprisingly, unlike Netflix, 3M doesn't realize that it can merely "add back" FX losses to non-GAAP EPS:
The company noted that foreign currency impacts reduced first-quarter pre-tax earnings by approximately $90 million or the equivalent of $0.10 per share. For 2015 in total, 3M now expects foreign currency impacts to reduce earnings by $0.35 to $0.40 per share versus a prior expectation of negative $0.20 per share.
All of this is happening even as the company "affirmed its expectation of 90 to 100 percent free cash flow conversion." In other words, every dollar in cash flow will be promptly returned to shareholders.
The problem is that in Q1 3M generated $1.1 billion from operating activities and returned $1.5 billion in the form of dividends and buybacks. And even with that it was unable to beat.
Which makes one wonder: have we reached the tipping point where shareholder friendly action no longer leads to a quick and easy boost in company shares?
