Should I Buy Johnson Matthey?

Published in Company Comment on 7 December 2012

Harvey Jones sizes up Johnson Matthey (LSE: JMAT)?.

It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy Johnson Matthey (LSE: JMAT)?

Platinum investment

Platinum and specialty chemicals producer Johnson Matthey has lost its shine in recent months, its share price retreating 7% since late September. That's an unexpected reversal for the world's biggest catalytic converter producer, which was treating shareholders to a maiden special dividend of 100p per share as recently as June, on top of the 55p per share full-year dividend. So why has Johnson Matthey stalled, and is now a good time to hop on board?

Catalytic people

Johnson Matthey is divided into four units -- catalysts and chemicals, precious metals, colours and coatings, and pharmaceutical materials -- but they all have one thing in common: platinum. The white metal. Used in everything from internal combustion engines to jewellery, from cancer drugs to fuel cells. Catalytic converters sales drove profits growth to June, as US truck sales grew and fuel-conscious Europeans switched to diesel cars. Revenues rose 20% to £12 billion, while pre-tax profits soared 58% to £409 million. But a subsequent fall in demand for precious metals hit platinum and palladium prices. Sales in its precious metal products division fell 5% and operating profits plunged 33%.

Precious little

With precious metals generating 40% of its profits, half-year numbers to 30 September were poor. Revenue fell a whopping 17% from £5.9 billion to to £4.89 billion. Things look a little better if you remove that number, with sales excluding precious metals rising slightly from £1.29 billion to £1.31 billion, while earnings per share barely shifted at 70.4p. But profit before tax dipped from £195 million to £183 million. 

With the World Health Organisation naming diesel exhaust as a carcinogen, demand for platinum for catalytic converters should accelerate, pushing supply to its limits. But that may also pose a threat, as the race is on to find cheaper ways of scrubbing out nasties such as nitric oxide and nitrogen dioxide. Some companies claim to be close to success. Johnson Matthey needs a booming car industry, but European demand remains low, and the US could still drive off that fiscal cliff. With 35% of its sales in the UK and Europe, the two austerities centres of the world, growth won't be easy to come by.

Emissions trade?

Johnson Matthey did announce a 3% rise in its half-yearly dividend, to 15.5p per share. It currently yields 2.3%, covered 2.8 times, according to Digital Look. Platinum prices have rebounded, although they have retreated from a recent peak of nearly $1,725 an ounce. As vehicle emissions rules tighten, Johnson Matthey's long-term future looks secure. But trading on a forecast price-to-earnings ratio of 15.8 times earnings for March 2013, it doesn't look cheap enough for me.

Shine on

Johnson Matthey's 2.3% yield doesn't exactly sparkle, but there are plenty of sizzling FTSE 100 stocks to choose from. You can discover some of the best high-yielders by downloading our free, in-depth report, "Eight Top Blue Chips Held By Britain's Super Investor".

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> Harvey doesn't own any shares mentioned in this article.

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