A look under the bonnet of Johnson Matthey

Richard Hunter, Head of Markets at interactive investor, commented “There is a great deal going on under the bonnet at Johnson Matthey (JMAT), with its cash generative ability allowing further reinvestment into new technologies.

The company is well positioned at the moment. The Clean Air division, which accounts for 64% of sales, continues to benefit via its catalytic converter expertise as emissions become even more of a focus for governments worldwide.

Meanwhile, the New Markets arm, whilst only currently contributing to 8% of sales, is home to its electric car battery development. Here, a significant shift towards electric cars could well benefit the company, let alone the exponential growth it may enjoy should hybrid vehicles fall fully into fashion, with both Clean Air and New Markets becoming beneficiaries.

Meanwhile, the entrenched progressive dividend policy continues, and even though the dividend yield of 2.2% is relatively meagre, this is also a reflection of the fact that Johnson Matthey is a group which is committed to continued investment in science and technology, enabling it to remain at the forefront of the next generation.

There will, however, continue to be bumps in the road along the way. The Return on Capital figure moved in the wrong direction, down to 16.4%, making the 20% target rather more of a stretch. The key metrics were impacted by restructuring costs and various charges, sending the reported earnings per share into a 23% decline and the pre-tax profit number down 31%. Foreign Exchange conversion also remains a potential concern, particularly in regard to the outlook, whilst even at constant rates overall profit was flat.

Nonetheless, the potential is clear for the company and the initial positive reaction to the results builds on a 10% spike in the share price over the last three months alone. During the last year, the shares have added 8.3%, outperforming the wider FTSE 100 (UKX) which has risen 2.1%, and this update is likely to consolidate the general market view of the shares as a buy for the long term.”

Source: interactive investor            Past performance is not a guide to future performance

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