Despite releasing a trading update today that confirmed full-year guidance, shares in Johnson Matthey (LSE: JMAT) have fallen by around 7% as oil prices are affecting investments in chemical plants. In fact, with oil at less than $50 per barrel, it is causing sector-wide delays in decisions regarding new factories and expansion projects. This could, over the medium term, impact negatively on Johnson Matthey’s top and bottom lines.
However, in the current year, Johnson Matthey’s performance has been relatively strong, despite losing commission revenue from Anglo Platinum in the first three quarters of the year and having a negative currency impact, too. As such, a rise of £0.5m to £96.5m in pre-tax profit for the quarter was held back by around £10 million, which on an underlying basis (i.e. excluding the impact of Anglo Platinum) meant that Johnson Matthey’s profit grew by over 10% in the quarter, which is an impressive result.
Looking Ahead
Clearly, a lower oil price is likely to hurt the chemicals sector over the medium term, with Johnson Matthey stating that an oil price above $70 per barrel would be more favourable for its outlook. This has been a key reason why shares in the company have underperformed the FTSE 100 in the last year, being down 2% versus a rise of 4% for the wider index.
However, looking ahead, Johnson Matthey and sector peers such as Elementis (LSE: ELM) and Croda (LSE: CRDA) are still forecast to deliver upbeat earnings growth numbers over the next couple of years. For example, Johnson Matthey’s bottom line is expected to grow by 12% next year and by a further 9% in the following year, while the growth figures for Elementis and Croda are generally in-line with those of the FTSE 100. In the case of Elementis, its earnings are set to rise by 5% and 6% over the next two years, with Croda being forecast to post an increase in profitability of 8% and 7% in 2015 and 2016 respectively.
Valuations
Despite their growth rates being generally in-line with those of the wider market, Croda and Elementis trade on premium valuations relative to the FTSE 100. For example, they have price to earnings (P/E) ratios of 21.6 and 17.5 respectively, while the FTSE 100’s P/E ratio is a rather more appealing 15.7. As such, their share prices could come under pressure in the short term – especially if there are downgrades to their forecasts moving forward.
Johnson Matthey, meanwhile, seems to offer better value than its smaller peers, with it having a P/E ratio of 18.1 and higher earnings growth forecasts than those of the wider market. As such, it appears to be the pick of the three and, although a lower oil price will undoubtedly hurt it in the short run and could push its share price further downwards this year, it could offer appealing long term growth potential.
However, it may be worth waiting for lower share prices before buying any of the three stocks, with the FTSE 100 looking like a better bet for 2015 right now.