Can Johnson Matthey’s share price produce gains?

Chemicals manufacturer Johnson Matthey’s [JMAT.L] share price has had a difficult year. After slumping to 2,149p on 30 October, Johnson Matthey’s share price rallied 18.68% since the start of the month to close at 2,605p on 16 November. As of 17 November, and ahead of the company’s first-half earnings on 19 November, Johnson Matthey’s share price dropped 1.2% to 2,573p. So, what should investors expect from the company’s earnings report?

Johnson Matthey’s share price opened the year at 3,011p, then hit 3,052p later the same day. So far, however, this is the highest Johnson Matthey’s share price has stood all year. By the end of February, even before the coronavirus pandemic hit, Johnson Matthey’s share price had dropped 16.6% to 2,511p.

By 2 April, Johnson Matthey’s share price had sunk to a low of 1,655.5p, a 45% drop from the year’s opening price. However, the company’s share price has staged a partial recovery since, even if the intraday high of 2,657p reached on 16 September dropped off quickly and the stock has failed to regain anything close to this level since.

Reducing output

Johnson Matthey has a wide range of chemical product lines, but its chief source of revenue is its clean air segment. This sells emission reduction technologies to industrial outfits — especially original equipment manufacturers (OEM) in the automotive sector — that reduce the harmful waste products from industrial production and make plant operations greener and safer.

The coronavirus pandemic forced many automotive plants to shut down, as both demand and supply were hit. By March, when fiscal 2020’s H2 results were announced, Johnson Matthey had already been forced into a restructure costing £140m. It had also taken coronavirus-related losses of £60m, which contributed to the year’s operating profits falling 27% to £388m. As the virus spread, Johnson Matthey was forced to halve its dividend in June and lay off 2,500 staff — 17% of its workforce — as demand for its main products disappeared.

These cuts ought to ensure Johnson Matthey’s future viability and enable it to invest £400m into its growth strategy, including a focus on climate change and sustainable technology, Anna Manz, Johnson Matthey’s outgoing CFO, told Reuters.

The company’s clean air division, which currently accounts for 60% of sales, is being consolidated, but its new ventures will also be of interest to investors. Its new markets segment, including eLNO electric vehicle battery material, its strong financial position and dividends record (which the company states it intends to restore to its former value once conditions ease), and a modest price-to-earnings ratio all stand to bolster Johnson Matthey’s share price going forwards, Manika Premsingh wrote in The Motley Fool.

There have been other positive signs for Johnson Matthey recently. As global economies begin to ease out of lockdown restrictions and plants adapt to coronavirus-safe working practices, production facilities are beginning to reopen. This trend is set to continue, with renewed optimism following Pfizer [PFE] and Moderna’s [MRNA] recent announcements of encouraging results from preliminary trials of their respective COVID-19 vaccines.

Research group Vara Research reported a mean revenue estimate of £6.03bn for H1 2020/21, with a low estimate of £5.35bn and a high of £7.14bn. The mean figure would represent a fall of 11.6% year over year as a result of the impact of the coronavirus pandemic, though the high estimate would beat last year’s equivalent figure of £6.82bn.

Nine analysts forecasting the results reported a mean EPS estimate of 40.38p — a year-over-year decrease of 57.8% for the first half.

What the analysts think

Despite gloomy forecasts for the upcoming set of financials, analysts are not universally pessimistic about Johnson Matthey’s share price prospects, though there is considerable variation in their assessments.

Among the 17 analysts polled on Vara Research, four analysts rated the stock a Buy, and two rated it Outperform, four rated it a Hold and three rated it a Sell. The stock was rated Equalweight, Overweight, Outperform and Neutral by one analyst apiece.

The average 12-month price target given to the stock by 12 Wall Street analysts polled on MarketBeat was 2,555p — a 0.7% decrease on Johnson Matthey’s share price at close on 17 November.

Johnson Matthey share price vitals, Yahoo Finance, 18 November 2020