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3M profit jumps but outlook disappoints

Diversified U.S. manufacturer 3M Co. (MMM-N) reported a higher quarterly profit Thursday, lifted by strong sales to the consumer electronics industry, but it trimmed the top end of its full-year forecast, sending shares tumbling.

 

The company, which makes a variety of healthcare-related products, also posted slower organic sales growth than in previous quarters because the flu season-related lift in surgical mask sales it enjoyed last year during the H1N1 virus scare is gone. It said the long economic downturn also appears to be discouraging patients from undergoing elective procedures that use its products.

 

3M also sounded a cautious note about the underlying health of two key markets, the United States and Western Europe, saying the economic outlook in both was "uninspiring" and that it expects "an extended period of slow recovery."

 

That sent its shares, which hit a 52-week high earlier this week, down as much as 7.3 percent on Wall Street.

 

"You saw organic growth decline in their safety and security business," said Adam Fleck, an analyst at Morningstar.

 

"But they're fighting a pretty strong headwind in H1N1-related sales. So that's probably going to continue here. Next year you'll probably see that flip back into positive territory as that normalizes."

 

3M, which has repeatedly beat expectations and raised its full-year forecast in recent quarters, posted a third-quarter profit of $1.1 billion, or $1.53 a share, up from $971 million, or $1.35 a share, a year earlier.

 

The company, which makes products ranging from Post-It notes and Scotch tape as well as medical, industrial and electronics products, said sales rose 11 percent to $6.9 billion, with double-digit sales increases in three of its six units.

 

Analysts, on average, expected Minneapolis-based 3M to report a profit of $1.51 a share on sales of $6.83 billion, according to Thomson Reuters.

 

It also said it hoped to increase sales by 11 percent in 2011.

 

"We live in a quarter where it is expected that you beat your number and raise your estimate," Brian Langenberg of

Langenberg & Co, an investment advisory firm.

 

"They met and they took down the high end of guidance because of deal dilution, which is understandable. But that won't be good enough for traders today," he said.

 

The company said sales in the Asia Pacific region, including China and Korea, were especially strong, jumping 28 percent. Sales in emerging markets grew 25 percent and now comprise 34 percent of worldwide sales, it said.

 

The company said it now expects a full-year profit of $5.70 to $5.74 per share, down from a previous estimate of $5.70 to $5.80 a share. It said the reduction was "due solely to anticipated earnings dilution" related to a series of acquisitions it made during the quarter, including its $900 million purchase of Cogent Inc., a maker of identification systems used to screen travelers at border crossings.

 

Oliver Pursche, the co-portfolio manager of the GMG Defensive Beta Fund, which does not own 3M shares, said the sell-off was an opportunity for investors.

 

"We view this as an entry point," said Pursche.

 

"We've been hearing a lot of caution from corporate managements because everyone is being more careful given the overall global economic environment. But for more conservative clients in separate accounts business who are looking for long-term capital appreciation, this is going to be a stock that we are going to own for them."

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