I reckon precious-metals refiner and recycler Johnson Matthey (LSE:JMAT) is positioned well to gain from an expected increase in precious-metal prices, a subsequent pick-up in scrap metal availability and accelerating demand for catalytic converters.
But Johnson Matthey is a classic cyclical play that has suffered from volatile metal prices and weak European car demand in recent months. Although the long-term investment case remains compelling, I for one will not be investing until signs of a recovery kick into gear.
Short-term outlook remains bleak
Johnson Matthey's January interims revealed third-quarter sales down 2% to £635 million, excluding precious-metals sales. This in turn drove underlying profit 19% lower to £84.3 million.
And the company warned that the insipid condition of the European light-vehicle and truck market is likely to keep its Emission Control Technologies sub-division under pressure -- sales here fell 6% in quarter three to £346 million.
Adding to these woes, the firm announced last week that it had lost a deal with South African platinum supplier Amplats, under which Johnson Matthey received discounts on its metal purchases. This is expected to cost the company around £35 million per year.
"Autocat" demand set to bounce higher
Despite current weakness, I believe that the prospect of rising car and truck sales across the globe should boost the catalytic-converter manufacturer over the longer term.
In spite of lasting weakness in Europe, new diesel regulations are due to be introduced in the region from next year, which should boost Johnson Matthey's 'autocatalyst' division.
Broker Liberum Capital anticipates a revenue annual growth rate from 2011 to 2015 of 25% for trucks and "non-highway" vehicle catalysts, and a reading of 10% for light-vehicle catalysts and petrochemical catalysts.
Earnings growth ready to gain traction
City analysts expect earnings per share (EPS) to dip 6%, to 145 pence, during the financial year ended March 2013. But growth is expected to rebound thereafter -- EPS is forecast to rise 7% next year to 155 pence before leaping an additional 12% in 2014 to 173 pence.
Johnson Matthey trades on a P/E ratio of 16.2 for 2013, which is anticipated to drop to 15.2 and 13.6 in 2014 and 2015 respectively. Although this is cheap compared with a forward P/E of 23.2 for the wider chemicals sector, I believe these levels remain too heady considering the still-murky near-term outlook.
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