This stock has slumped 60pc – here’s why you should still buy

Questor’s long-term investment case has not changed, especially now shares are low

Our advice to buy FTSE 250 member Johnson Matthey has proved to be thoroughly misplaced. Shares in the sustainable technologies business have slumped by 60pc since we first tipped them in June 2018.
Even the mid-cap index’s 3pc decline over the same period looks decidedly appealing next to the stock’s slide. Despite flagging the company’s recovery potential several times since our initial tip, it has ultimately failed to mount a sustained comeback.
Questor, though, is not yet ready to give up on this particular stock. If Johnson Matthey’s investment appeal was now lacking, we would not hesitate to discard it and crystallise our current paper loss. However, its current market valuation, long-term growth potential and improving industry outlook suggest that it still offers investment appeal.
Crucially, the firm is well-placed to benefit from the ongoing global energy transition. Since the cost of borrowing is set to fall across developed economies as monetary policy easing continues, projects and purchases linked to net zero that were previously financially unattractive should become more viable. This is likely to bolster the pace of the energy transition to at least some extent over the coming years.
The company’s financial performance is set to be further boosted by cost savings. In its latest financial year they amounted to £75m, which was comprehensively ahead of a target of £55m. The firm expects cost savings made as part of its ongoing simplification plan to total £200m by the end of the current financial year, which is set to contribute to a 12pc annualised earnings growth rate over the next two years. The company’s half-year results, which are due to be released later this month, will provide an update on its recent financial progress.
The firm’s shares currently trade on a very modest forward price-to-earnings ratio of 8.6 using market estimates for the 2026 financial year. This suggests there is scope for a significant upward rerating that equates to strong recovery potential.
In Questor’s view, the company’s cheap market valuation means that its share buyback programme represents a sensible use of excess cash. The firm is currently in the process of returning £250m to shareholders, with this being funded by the £550m it received from the recent disposal of its medical device components business. This represents a sizeable chunk of the company’s current market value, with its market capitalisation amounting to just £2.8bn.
Alongside its generous share buyback programme, Johnson Matthey currently yields a relatively attractive 5.1pc. This is around 170 basis points higher than the FTSE 250 index’s yield. Given that dividends were covered over 1.8 times by profits last year, the company is in a strong position to pass future profit growth on to investors via higher payouts.
Separately, the firm’s net gearing ratio of 40pc suggests that it has a solid financial position. Although net finance costs were covered a rather measly three times by operating profits last year, this figure is set to rise as the firm’s financial performance improves. Moreover, the company is expected to use part of the proceeds from recent asset disposals to reduce debt levels.
Johnson Matthey could yet experience a challenging operating environment in the near term. Time lags mean that impending interest rate cuts are unlikely to have an immediate impact on the world economy’s performance.
Furthermore, the company may need to become increasingly adaptable as the energy transition continues. New technologies and revised regulations are likely to prompt periods of uncertainty for firms that are aiming to profit from the world’s pursuit of net zero. Indeed, the future pace of energy transition remains a known unknown. This column continues to believe that it will be anything but a smooth process, with the future likely to include periods of slower adoption interspersed with phases of faster progress.
However, in Questor’s view, the company’s shares include a wide margin of safety that fully compensates investors for the presence of ongoing uncertainty. Given the firm is forecast to post double-digit earnings growth over the next two years, has a relatively attractive yield and boasts modest debt levels, its shares continue to offer long-term investment appeal.
Questor says: buyTicker: JMATShare price at close: £15.08
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