J.P. Morgan Reiterates Neutral Rating on 3M (MMM)

J.P. Morgan is out with an analyst note this morning where it reiterates its Neutral rating on shares of 3M (NYSE: MMM); it has a $93.00 price target on the stock. The JPM analysts cited a sales update by 3M, which was positive, suggesting “upside to 2Q Street numbers.”They noted, “While cost dynamics could make the reported incrementals lower than 1Q, this still implies a positive result that potentially could approach ~$1.50 (see details below). Taking a step back, the positive momentum seen in 1Q was unlikely to reverse overnight, and expectations for 2Q were high. This, however, does not change our more cautious stance on 2H10 and 2011 despite the near-term upside, with a range of non-fundamental dynamics (forex, pension) lingering on the horizon. All in, we give credit where credit is due for a franchise that continues to deliver, but no change to our stock view following the news.”The analysts also said, “The sales beat is positive, with the 2Q EPS upside depending on the degree of margin leverage – this could potentially approach ~$1.50, compared to our estimate of $1.42. At the midpoint, this implies ~$100mm of revenue upside versus Street numbers – assuming 40% incrementals on that revenue beat would imply ~$0.04 of EPS upside (~$1.47 versus Street $1.43). Looked at another way, the 1Q reported y/y incremental margin was 46%, though as we move into 2Q there are some additional dynamics to consider: 1) “The company plans ~$140mm of incremental y/y growth spend in 2010, very little of which occurred in 1Q2) Year over year comps on carryover restructuring saves are getting more challenging, we estimate by ~$30mm3) Utilization benefits versus last year also get harder (~$0.10-0.25 benefit for the year, which is front-end loaded)4) Higher stock comp in 1Q should be offset by the return of incentive comp in 2Q, ~$50mm each.” “Putting the pieces together, the 2Q10 y/y incremental faces $75mm+ in headwinds, meaning the reported incremental is likely in the low- to mid-30% range versus ~40% leverage we would expect normally. On this basis, it would imply an EPS level potentially in the low-$1.50s. As for non-fundamental items, the reported vs. organic sales for 2Q suggest a modest (~100bps) headwind from FX, showing that this will be a drag in the back half at current rates, likely in the mid- to high-single digits.” They closed by saying, “Either way, the 2Q revenues look solid and we give credit where credit is due, as this is a strong franchise that continues to deliver. We’d expect the sources of upside (electronics, auto, EM) to be similar to those seen in 1Q, which is positive near term but doesn’t remove the fundamental questions around growth in 2H10 and 2011, where comps get tougher and visibility is less clear. We remain cautious on the intermediate-term growth, recognizing that 2Q will ultimately come in better than we originally expected.”