Event: 3M (MMM) reports Q4 results tomorrow before the close. The options market is implying nearly a 3.5% one day move, which is rich to its 4 qtr and 10 year avg one day move of about 3%.
Price Action / Technicals: MMM is down about 8% on the year, basically inline with the decline of the S&P 500 (SPX), but down almost 20% from its 52 week and all time highs made early last year.
On a one year basis, MMM has now bounced on three occasions from $135, with a panic intra-day low being made on August 24th just below $135, a re-test and reversal low in late September, and then a similar sort of reversal last Wednesday:[caption id="attachment_60536" align="aligncenter" width="600"] MMM 1yr chart from Bloomberg[/caption]
Looking back to the 2009 lows, its evident that the long term uptrend is down another 10-20%, while the stock just broke the uptrend that had been in place from the 2011 lows:[caption id="attachment_60537" align="aligncenter" width="600"] From Bloomberg[/caption]
MY VIEW: MMM is deemed to be defensive given its massive commitment to cash return, an existing $12 billion share buyback, a dividend that currently yields about 3%. The problem in my view is that the company has retired over 100 million shares since the start of 2010, helping earnings grow from $5.75 a share to last year’s expected $7.70, while sales have gone from $26.6 to an expected $30.17 in 2015, up 12%. So eps has grown 34%, the company has done a nice job managing earning growth, at the behest of their balance sheet. Since 2010 their cash position has decreased by 65%, while their debt load is up more than 50%.[caption id="attachment_60539" align="aligncenter" width="600"] From Bloomberg[/caption]
If the stock were to continue to decline then the $10 billion worth of stock, plus the couple billion worth of shares the company has issued in the last couple years would be a fairly costly endeavor for shareholders.
The stock trades at close to 17x 2016 expected earnings which is above a market multiple for mid single digit earnings growth that is massively manufactured, and sales growth in the low single digits.
Yeah yeah, an industrial conglomerate like MMM should be a big beneficiary from lower input costs, yet 2015 earnings at an expected 3% growth year over year was the slowest growth since 2009, on a 5% earnings decline.
Whats the Trade? If I were inclined to play for a breakdown on weak guidance to the long term uptrend near $120 I might consider the following trade:
Trade Idea: MMM ($138.75) Buy March 135/115 Put Spread for $3.15
-Buy 1 March 135 put for 3.75
-Sell 1 March 115 put at .60
Break-Even on March Expiration:
Profits: between $131.85 and $115 of up to $16.85, with max gain of $16.85 below $115
Losses: of up to $3.15 between $131.85 and $135 with max loss of $3.15 above $135
Rationale: If you are inclined to play for a breakdown below recent support, all the way back to the long term uptrend, then you want to give yourself some time. The stock is oversold, and a good entry on the short side would likely be up closer to $145.
WE HAVE NO AXE ONE WAY OR THE OTHER, BUT THIS IS THE SORT OF STOCK YOU WOULD WANT TO PRESS ON THE SHORT SIDE IF THEY WERE TO GIVE WEAK GUIDANCE.