Photo by Austin Distel on Unsplash
 

Unsticking 3M From The Portfolio (MMM)

3M posted a 6.2% decline in fourth-quarter sales to $8.08 billion with net income skidding 59.6% to $541 million. Sales declined in all four 3M business segments during the fourth quarter compared to last year. Fourth quarter earnings included an $800 million pre-tax charge related to the company’s decision to exit the PFAS forever chemical business by the end of 2025 which will ultimately result in total exit costs of between $1.3 billion to $2.3 billion.

For the full year, 3M reported sales declined 3.2% to $34.2 billion with net income slipping 2.4% to $5.78 billion. During 2022, free cash flow declined 34% to $3.8 billion. 3M returned $4.8 billion to shareholders during 2022 through dividends of $3.37 billion and share repurchases of $1.46 billion.

In 2023, 3M expects to market and macroeconomic challenges to persist. Based on this outlook, organic sales growth is expected in the range of -3% to flat with adjusted EPS of between $8.50 to $9.00, down 14% from 2022 at the mid-point. 3M is continuing to work through PFAS-related litigation and toward a mediated resolution for Combat Arms litigation.

Given 3M’s deteriorating business fundamentals with sales, earnings, and free cash flow all declining and potentially large litigation charges looming, we have decided to unstick 3M from our portfolio by selling our position as market and macroeconomic challenges are expected to persist in 2023.

This was not an easy decision given that we initially purchased the stock 16 years ago with the stock providing steadily growing and hefty dividends over that time. While we still have gains on our original position, our subsequent position put us underwater with an overall 10% loss on a total return basis.
 

Maximus Maximized Valuation (MMS)

Maximus reported fiscal 2023 first-quarter sales increased a healthy 8.5% to $1.25 billion with net income falling 25% to $40.0 million and EPS down 24% to $0.65. Organic revenue grew 10.3%, driven by new or expanded programs in all three business segments on strong demand for services Maximus provides. Net income declined on tough comps from last year’s profitable short-term COVID response work and lower interest expense due to last year’s historically low-interest rates.

Maximus returned $17.0 million to shareholders during the quarter via dividend payments with the company ending the quarter with $63.1 million in cash and equivalents, $1.49 billion in long-term debt, and $1.58 billion in shareholders’ equity. Management’s capital allocation strategy is focused on paying down debt and making strategic acquisitions for long-term growth.

Given strong momentum from the first quarter, Maximus raised its fiscal 2023 guidance. Management now expects revenue to range between $4.85 billion and $5.0 billion, compared to prior revenue guidance of between $4.75 billion and $4.90 billion. Adjusted operating income is expected to range be- tween $415 million and $440 million, compared to a previous range between $390 million and $415 million. Adjusted EPS is now expected to range between $4.00 and $4.30 per share, compared to prior guidance of between $3.70 and $4.00 per share. Free cash flow is expected in the $225 million and $275 million range and reflects expected working capital increases as a result of higher revenue later in the fiscal year. Maximus’ stock jumped 18% during the past three months. With the stock valuation maximized, we plan to cash in our profits by selling Maximus to invest the profits in more attractive investment opportunities.
 

Berkshire Hathaway Annual Report (BRK-B)

Berkshire Hathaway’s annual report was released as we went to press. Berkshire reported record operating earnings of $30.8 billion in 2022. During the year, the company repurchased $7.9 billion of its stock. We will provide a more detailed analysis of the report on our website and in our next Weekly Update. We also plan to virtually attend the Berkshire Hathaway annual meeting in May and will provide the highlights of the meeting in our June 2023 newsletter. Stay tuned.

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