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Smart Investor: should you buy this post-credit crunch success?

Johnson Matthey's share price has soared since 2009.

 
Smart Investor: should you buy this post-credit crunch success?

Johnson Matthey's share price has enjoyed a tremendous run in the post credit crunch years, rising from 1100p at the start of 2009 to today’s price of 2467p. Is now a good time to buy a slice of the specialist chemicals company?

 

FTSE 100 listed Johnson Matthey (JMAT.L) is split into three main divisions: Environmental Technologies, Precious Metal Products and Fine Chemicals, with the company operating in over 30 countries around the globe. With a market capitalisation of £5 billion, it is the 61st biggest listed company in the UK and employs 5600 people in a wide variety of locations.

Profitable and resistant

In terms of company performance (as opposed to share price performance) the past five years have been highly successful for Johnson Matthey. It has made a net profit in each of the five years, with net profit increasing from £185 million in 2008 to £315 million in 2012. However, this does not paint a true picture of its performance, with net profit being fairly flat until this year when it jumped from £183 million to £315 million.

Of course, challenging economic circumstances mean that maintaining a profit during recent years is still impressive. Indeed, return on equity (ROE) averages 15.5% over the past five years, being 20.6% last year. This is very attractive and shows that the company is both highly profitable and somewhat resilient to tough trading conditions.

Not for income-hunters

Meanwhile, a payout ratio of just 37% for 2012 means that shares currently yield only 2.2%. This is disappointing (and below the FTSE 100 average of 3.5%) although it should be noted that the payout ratio was considerably higher in previous years (between 42% and 53%) but, still, this is not a company for income seeking investors at current price levels.

With debt levels being sensible, the company’s debt to equity ratio is moderate at 41%. This affords it substantial headroom when servicing its debt, with interest cover being comfortable at 12.

As mentioned above, Johnson Matthey has shown some resilience during a difficult economic period which, when coupled with its attractive ROE, show that it has an economic moat of sorts. However, a major part of its business is the supply of catalytic convertors to cars and so it is heavily reliant upon demand for cars across the globe.

In addition, its precious metals division is sensitive to changes in the platinum price, with interim results providing evidence of this. Indeed, a lower platinum price hit interim results to the tune of £1 billion of revenue recently.

Dependency and expense

Therefore, whilst Johnson Matthey has shown resilience over the past five years, it is too dependent upon both the price of platinum and the demand for cars for it to have a substantial economic moat. Indeed, investors should seek a significant margin of safety to reflect this, although with shares currently priced at 2,467p they trade on a price to earnings (P/E) ratio of 16.8 and a price to book ratio of 3.6. Both of these ratios indicate that shares are unattractive at current levels.

So, in spite of an impressive track record, attractive ROE and sound finances, Johnson Matthey is simply too expensive to merit purchase at current levels. Its lack of a substantial economic moat means that investors should be prepared to wait for a significant margin of safety before considering its purchase, although this is unlikely to occur in the short to medium term. Avoid.

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