The Johnson Matthey share price crashes

There are 101 stocks in the FTSE 100 index (one company has dual-listed shares). Today, the Johnson Matthey share price is ranked 99/101 Footsie stocks over 3o days. In other words, it’s the index’s third-worst performer over one month.

As I write, the Johnson Matthey share price stands at 2,132p, down 50p (-2.3%) since Tuesday. It is also down 6.6% over five days, 21.5% over one month, and 33% over six months. Yikes. Then again, the shares soared earlier this year, hitting their 52-week high of 3,363p on 28 April 2021. But it has been all downhill since then, with the stock losing more than a third (-36.6%) since its spring peak.

Battered by battery pull out

After recent setbacks, Johnson Matthey is valued at £4.1bn, making it a FTSE 100 lightweight. Indeed, further declines could see the group exit the blue-chip index for the mid-cap FTSE 250. After recent falls, this stock trades on 20 times earnings and offers an earnings yield of 4%. The dividend yield is 3.3%, below the FTSE 100’s 4.1%.

So what went wrong? The steepest fall in the Johnson Matthey share price came on Thursday, 11 November, when the group revealed that it was pulling out of the market for battery metals. This left some investors worrying the group might go ex-growth, leading to a one-day crash of 19.1% in JMAT stock. But some Fools now believe this share is in bargain territory.

But around an hour later, most of this morning’s losses were reversed. So, what’s going on?

Johnson Matthey’s share price versus earnings

I’ve previously explored this business. But as a quick reminder, Johnson Matthey is a specialist chemical and technological solutions company. Its purpose is to help industries such as oil & gas, pharmaceuticals, and agriculture reduce their impact on the environment without compromising performance.

Earlier this month, management made a surprise announcement that it was abandoning its investments in the highly anticipated electric vehicle battery sector. After an internal review, the company discovered that the battery metal market is becoming highly commoditised. And it simply can’t compete in a way that would create long-term value for shareholders.

This announcement was responsible for the Johnson Matthey share price crash earlier in the month. And today, the impact of this decision became clear in the latest earnings report. Underlying operating profits actually came in 94% higher than a year ago, reaching £293m. However, all of this gain was wiped out by a £314m impairment of its axed battery metal operations. And if it wasn’t for the one-time earnings of £44m from a win in a legal battle, operating profits for the last six months would have been negative.

Needless to say, this isn’t a pleasant situation. So, seeing the stock take an initial hit on this report is hardly surprising.

Taking a step back

This sudden capital expense shock seems to have initially spooked investors resulting in a near 10% drop at one point this morning. However, the Johnson Matthey share price quickly got almost back to Tuesday’s closing price once investors calmed down and took a closer look at the report.

Seeing operating profits hammered isn’t a pleasant sight. But the catalyst was a one-time impairment charge. Meanwhile, the firm’s top line has been busy expanding by 23%, with revenue reaching £1.9bn. This growth is primarily being driven by its Clean Air and Efficient Natural Resources divisions. And given the government incentives for corporations to lower their carbon footprints, it’s not surprising to see the demand for Johnson Matthey’s products rise. What’s more, it doesn’t look like management thinks demand will drop any time soon since it just raised shareholder dividends by 10%.

There are still some headwinds to come with supply chain disruptions causing problems for its automotive customers. And swings in foreign exchange rates is expected to adversely impact the full-year bottom line by around £15m. But all things considered, the business seems to be doing well.

Final thoughts

The last time I looked at this firm, I added it to my watchlist to wait for the half-year report released today. Now I have a much clearer picture of how things are going. And I feel the Johnson Matthey share price can make a solid recovery long term.

Having said that, I’m personally not interested in adding this stock to my portfolio. Why? Because I think there are far better opportunities to be found elsewhere.

Why did the Johnson Matthey share price crash?

The source of this damage is an entirely unexpected release from the company, which said that it is exiting its eLNO business. eLNO stands for its “nickel-rich advanced cathode materials”, which are used for manufacturing batteries used in electric vehicles (EVs). 

I was taken aback on learning this because EVs are rising in popularity. And the fact that Johnson Matthey itself has been pretty bullish about them recently. It even started construction of an entire manufacturing plant in Poland specifically for the production of these materials.

Justified explanation 

The company explains that this U-turn is because the potential returns are not justified by the kind of investment required. This is for two reasons. One, it says that more competition is coming into this promising market, which is turning it into a “high volume, commoditised market”. And two, Johnson Matthey’s costs are higher than those of bigger players. So its margins could get squeezed as prices might drop and it lacks cost competitiveness. 

Disappointing as this is, I do not think this should be taken to mean the company is out of the clean energy race altogether. It also has hydrogen fuel-cells as one of its lines of business. This is promising as well, and the technology is also being used in EVs, like those made by Nikola, for instance.

How does it make its money

In any case, for now Johnson Matthey’s biggest revenue generator is its Clean Air segment, which includes its emission control systems. This is followed by Efficient Natural Resources, which provides catalysts that help companies decarbonise their operations. Together they account for 89% of the company’s total revenues. New markets, on the other hand, which includes its battery materials’ business, accounts for only 9% of the total. Its share in profits is even smaller at less than 2%. 

What I’d do about the FTSE 100 stock

Keeping this in mind along with the fact that Johnson Matthey has been a profitable company for a long time, I am not terribly disheartened by the latest development. If anything, it might just streamline its operations and make it more profitable in the future, something I have expressed concern about in the past. I do think that we should brace for weakness in its next results due later this month, though. In my view, these could reflect the extent of the financial challenge presented by the eLNO business that could have prompted the hasty exit. 

But as a long-term investor, contrarian as it may sound on the surface, I like the stock now. In fact, I saw the dip as a buying opportunity and bought the FTSE 100 stock for 2022. 

Johnson Matthey and a changing world

While it has been around for over two centuries, the changing world has made recent years challenging for Johnson Matthey. One of the company’s key focusses in recent decades has been catalytic converters. The best-known use for these devices is to help filter out some chemicals when cars burn fuel.

But fuel has been cleaned up in recent decades. Even more alarmingly for the business’s prospects, some countries may phase out internal combustion engines in coming decades. So in the long term, the market for automotive catalytic converters will likely shrink and could even disappear altogether.

Johnson Matthey has been alert to this possibility. It has been developing other businesses, including one focussed on batteries, which could be a fuel source for electric vehicles. These include lithium batteries. But while that makes Johnson Matthey one of the better known UK lithium shares for now, that is about to change.

A strategic shift among UK lithium shares

The company announced that it plans to exit the battery materials business altogether. The company reckons that, although demand for batteries is growing, as it does so the market is becoming high volume and commoditised. That makes it harder for a company like Johnson Matthey to exert pricing power. In a high volume, commoditised market, cheap overseas competitors can hurt the profit margins of companies based in higher cost production areas.

The company is not hanging about, either. It told the market that it will “move swiftly” in getting out of the batteries business. So, while there are still listed UK lithium shares, Johnson Matthey will likely soon have no exposure to the lithium business.

Why I like the Johnson Matthey strategy

The market punished the company, sending the shares 19% down in today’s trading, at the time of writing this article earlier today. Over the past year, the shares have lost 9% of their value.

I reckon that reaction may have been overdone. Johnson Matthey has been serious about the battery materials business and invested heavily in it. It has now come to a considered strategic decision that it lacks long-term competitive advantage. It has therefore decided to throw in the towel. While that may be painful in the short-term, it strikes me as a smarter thing to do than spend years fighting what it thinks is a losing battle. The company has enough challenges ahead with falling demand for catalytic converters – getting out of the difficult battery business seems like a prudent call to me.

Whether or not I consider Johnson Matthey attractive, when considering it for my portfolio I would no longer consider it among UK lithium shares. If I wanted exposure to lithium for my holdings, I would now look elsewhere.

So, what exactly happened? And is this a buying opportunity for my portfolio?

Competitive pressures are too high

As a quick reminder, Johnson Matthey designs and develops chemical and technological solutions for a wide range of industries. Its mission is to “enable cleaner air, improved health and the more efficient use of our planet’s natural resources”. The sectors it serves vary from the Oil & Gas industry to the Automotive. And it’s the latter that appears to be the catalyst of the FTSE 100 stock’s fall this morning.

Despite the rise in demand for electric vehicles (EVs) and, in turn, battery metals, management announced it would be exiting this space indefinitely. Given this segment’s seemingly explosive growth potential, this is quite a surprise, and I can understand why investors are disappointed.

An internal review revealed that reaching the next set of critical milestones will be a quite expensive endeavour. And with a vast amount of competition building up, management doesn’t see a viable path to creating long-term value for shareholders. As a result, it’s ceasing all further investment in the space and intends to sell off this division in the near future.

When combining this with the announcement that CEO Robert MacLeod is stepping down in 2022 and the full-year trading outlook likely to fall at the lower end of guidance, the double-digit decline of the Johnson Matthey share price makes a lot of sense.

Is this FTSE 100 stock now on sale?

While watching investments crash is never fun for shareholders, it can sometimes create buying opportunities. So is Johnson Matthey on sale? Possibly.

The battery metal division to be sold off is worth roughly £340m. Under the leadership of future CEO Liam Condon, management intends to use the proceeds of the sale to accelerate its investments into hydrogen technology as well as solutions for decarbonising the chemical supply chain.

Hydrogen technology is getting more attention as acquiring the element is getting cheaper and has several advantages over EVs. Meanwhile, as governments worldwide are raising carbon taxes, firms reliant on chemical supplies are more likely to seek out Johnson Matthey’s services.

Time to buy?

I can’t deny that the exit from the battery metal space is a bit of a shock, especially given the firm’s success with its eLNO material. But I think this is far from a catastrophe, as many investors seem to believe.

Having said that, I’m keeping this FTSE 100 stock on my watchlist for now. Its half-year report is due to come out on 24 November. And it should provide a much clearer picture of the state of the business and its outlook. 

Recently, I’ve been scanning the UK stock market for attractive renewable energy stocks. Here’s a look at two I’d be happy to buy for my portfolio today.

Top UK renewable energy stocks

One clean energy stock I really like the look of is Renewables Infrastructure Group (LSE: TRIG). It’s a FTSE 250-listed investment company that owns a broad portfolio of wind and solar farms across the UK and Europe. Its goal is to provide steady, sustainable returns to investors through dividends while preserving the capital value of its investment portfolio.

What I like about TRIG is that it offers a lower-risk way of playing the renewable energy theme. Typically, clean energy shares tend to be highly volatile. One reason for this is that many companies that operate in this space are not making any money. TRIG is different because it owns a diversified portfolio of assets and is actually profitable. I think it could play a key role in my dividend portfolio and provide steady long-term returns.

Zooming in on the dividends, TRIG has a great track record. Over the last five years, it has paid out annual dividends of 6.73p, 6.61p, 6.45p, 6.35p, and 6.20p. This year, analysts expect a payout of 6.76p per share. At the current share price of 130p, that equates to a very attractive yield of 5.2%.

One risk to consider here is that the company is trading at a 14% premium to its net asset value. In other words, those investing now are paying a price that’s higher than the sum of the company’s assets.

I’m comfortable with this risk however. Given TRIG’s track record, I think the stock is worth a premium.

A FTSE 100 clean energy stock

Another clean energy company I like is Johnson Matthey (LSE: JMAT). This is a FTSE 100 stock with a market-cap of around £5bn.

JMAT is not a ‘pure play’ on the renewable energy theme. That’s because the company’s quite diversified, operating across a range of industries including chemicals, pharmaceuticals, and electric vehicles.

However, the company does have a strong focus on sustainability and, recently, it’s been moving into the green hydrogen space. For example, in July, it acquired the assets of Oxis Energy Limited, which it believes will “significantly accelerate” the scale-up of its green hydrogen business.

Like Renewables Infrastructure, I see JMAT as a lower-risk way to play the clean energy theme. This is a large, well-established company that’s profitable and pays regular dividends (the prospective yield is about 3%). I think it offers a better risk/reward proposition than some of the more popular UK clean energy stocks such as ITM Power.

Of course, it’s not risk-free. There’s no guarantee the company’s move into green hydrogen will pay off.

However, with the stock trading on a forward-looking P/E ratio of just 12, I’d be happy to take a small position here.

Diversified business

Traditionally, Johnson Matthey has been known for its focus on chemicals (specifically platinum) and scientific industry and technology. It has a diversified business model and a range of interests in renewable energy through its products and services.

As well as chemicals and pharmaceutical materials, Johnson plays a part in manufacturing catalytic converters for cars. These help a car’s engine emit less carbon into the atmosphere. It is also working on manufacturing components for electric vehicles. Finally, it has a vested interest in researching platinum-based cancer drugs and fuel cells too.

As I write, shares in Johnson Matthey are trading for 2,636p. At this time last year, shares were trading for 2,349p, which is a 12% return over 12 months. At current levels, if Johnson Matthey’s transition to becoming a fully fledged FTSE 100 renewable energy stock were to be successful, I would consider the shares cheap.

Performance and outlook

I often look at past performance to gauge a stock’s record, although I understand that past performance is not a guarantee of the future. Revenue has increased year on year for the past four years, which is positive.

Looking at some more recent updates, Johnson’s last full-year results were announced in June. I saw these as generally positive with some impact from Covid-19. Revenue increased by 8% to £15.7bn but sales fell by 5%. Overall underlying profit fell by 5% to £504m. These figures are compared to the last full year of trading. A dividend of 70p per share was declared, which is a positive for me.

Johnson’s Q1 update released at the end of July noted that sales had returned to pre-pandemic levels and operating profit was ahead of pre-pandemic levels. This has been driven in part by volatile and higher-than-average precious metal prices.

The future outlook could be positive in my opinion. I mentioned earlier about Johnson’s foray into the electric vehicle component market. It is building a bespoke factory in Poland to facilitate this. Furthermore, it is working on green and blue (fossil fuel based) hydrogen. Green hydrogen is an area of high interest to governments worldwide.

FTSE 100 picks have risks

Johnson Matthey has some good fundamentals and lots going for it currently. My focus is where it could enhance its appeal through future projects. I must consider the risks involved, however.

Firstly, volatility in the world economy caused by the pandemic has had a knock on effect on commodities prices. This has benefitted Johnson recently but could equally hinder it in the future if prices were to dip or soar too high. Financials and performance could be affected. Furthermore, the race towards green energy is a saturated one. Competition to get ahead in this market is intense. If Johnson were to fall behind competitors it could lose market share and investor sentiment could tail off.

Overall I do like Johnson Matthey shares for my portfolio. I would consider adding shares and holding them for the long term. I will keep a keen eye on future developments to see if current projects and ambitious future goals come to fruition. If they do, I would expect to see a nice return.

Hargreaves Lansdown

Occupying the third spot of least-liked top-tier stocks is online stockbroker Hargreaves Lansdown (LSE: HL). I find this quite surprising considering how highly the company is regarded by its users.

Then again, recent trading has disappointed the market. The shares tumbled in August as profits missed expectations, despite a flurry of interest in meme stocks. All told, the platform provider’s valuation has fallen 13% in the last year. The usually-pedestrian FTSE 100 is up 18%. 

Will things get worse before they get better? Possibly. The recent growth in new client numbers seen could slow as lockdown savings dwindle. In light of competition, Hargreaves may need to reduce its fees too.

There’s still lots to like. Returns on capital and margins are seriously high (albeit falling) and the company still possesses a stonking amount of cash. At 26 times forecast earnings, HL shares are notably cheaper than those of rival AJ Bell (36 times).

One for my watchlist, I think.

Johnson Matthey

Catalyst systems provider Johnson Matthey (LSE: JMAT) is the second most hated FTSE 100 member right now, at least based on short-selling activity. While nowhere near the top spot (currently occupied by cinema operator Cineworld), four funds are still betting that its share price will fall in the near term.

Again, this is quite surprising. Concerns over climate change and resource scarcity continue to hit the headlines. As a self-styled “global leader in sustainable technologies“, this surely puts JMAT in a good position. Recent news that the company has joined a British consortium to develop solid-state batteries for electric vehicles is just one example of this.

Can I get better capital growth elsewhere? Well, with a market cap of £5bn, JMAT shares certainly won’t double in value overnight. Having climbed only 7% in value in the last 12 months, the potential costs of investing here and not elsewhere can’t be ignored either.

Even so, a P/E of just 11 looks pretty good value to me. 

Sainsbury’s

Easily the most shorted FTSE 100 stock right now is supermarket firm Sainsbury’s (LSE: SBRY). That may seem strange considering the share price is up 50% in the last year, partly on speculation that the company is now a bid target. Indeed, a resolution to the takeover battle of Morrisons has now led to whispers that the losing candidate — Fortress Investment — will now turn its attention to the UK’s second-biggest grocer.

It’s not hard to see the appeal. Despite the recent momentum in its share price, Sainsbury’s stock still changed hands for 13 times earnings as markets opened this morning. That could prove to be a great deal, especially if a bid leads to a ‘short squeeze’ (in which the more pessimistic traders rush to close their positions).

However, I believe no company is worth buying purely on takeover rumours. Away from speculation, Sainsbury still appears a very average business. Margins are punishingly low and competition for shoppers is always fierce. The ongoing supply chains issues could also make for a tough Christmas period. I’m steering clear.

The direction of travel is clear. A recent survey of children showed many viewed the environment as their biggest concern. There’s a whole generation of future consumers, committed to the environment, who’ll be adults in not so many years.

So my working assumption is that renewable energy stocks have a brilliant long-term future. My trick is to back the right horse, at the right time, at the right price!

The ambitious energy company

Ceres Power (LSE: CWR) is looking to use its technological know-how to become an asset-light licensing and royalties business. Ceres technology is embedded in hydrogen fuel cells, helping the world transition towards clean energy. It has lucrative partnerships with companies like Bosch and Doosan.

The strategy could be very attractive to investors because asset-light business models, think of platform websites like Moneysupermarket and Rightmove, for example, can command a premium. That’s because they often have high margins, low costs and high cash conversion. All of these are things investors want to see and as such are willing to pay a higher price for.

So the business model is pretty attractive and Ceres Power already has very noteworthy clients.

There could be a long way to go though. Ceres Power needs to keep spending on R&D because it’s in a very competitive market. Plus it’s loss-making and could continue to be so for many years. The number of shares has gone up every year as well, so investors are being diluted, in the end, that will likely make it harder to make a profit from investing. It’s a stock I watch with interest but I don’t think I’ll be buying it any time soon.

Transitioning to a renewable energy stock

Johnson Matthey (LSE: JMAT) may have its history in chemicals and heavier industry, but it’s transitioning to focus on developing technologies to help store and develop renewable energy. It’s currently constructing a new factory in Poland to manufacture components for electric vehicle batteries.

Beyond that, it’s also working to develop green hydrogen, an area of intense scientific and government focus. It’s believed that green hydrogen, once commercially viable, could have huge potential. If Johnson Matthey could be at the front of the pack in developing green hydrogen, the rewards currently are incalculable but could be huge. The company also has 15 blue hydrogen (using fossil fuels to create the hydrogen) projects in its pipeline globally.

I see Johnson Matthey as a company with a strong focus on becoming a renewable energy stock. I believe that if it’s successful, it could command a higher rating and the share price, as a result, could be much higher. But for now, I’ll watch its progress with interest before I add any to my portfolio. There are a lot of players in the renewable energy space and I don’t want to jump in too soon. It’s also very possible that Johnson Matthey’s transition may not pay off for shareholders. I’ll wait and see.

The FTSE 100 isn’t really a UK index. More than 70% of its profits are earned outside of the country. This can be both a benefit and disadvantage for investors.

On the one hand, it’s pretty easy to build international diversification by investing in these blue-chip stocks. On the other hand, if investors want exposure to the UK economy, the FTSE 100 index isn’t really the best place to look. The FTSE 250‘s a better gauge of British business activity. 

Still, there are plenty of companies in the index that have both a UK and international presence. It’s these I’d focus on buying for my portfolio. 

Blue-chip shares to buy now

The first group on my list is the UK fashion retailer Next (LSE: NXT). At the beginning of the pandemic, this business shut all of its stores almost overnight. When service resumed, the company was still so busy it had to limit orders. 

That’s because its technology and fulfilment investments over the past five years have paid off over the past 12 months. Online sales have boomed as consumers’ options were limited. And I think the FTSE 100 company is now primed to take advantage of the UK economic recovery. 

According to its latest trading update, full-price sales in the 11 weeks to 17 July were up 18.6% versus 2019 levels. It now expects to earn a profit of around £750m for the financial year, which is significantly above initial projections. 

As Next continues to grow, I think this is one of the best shares to buy now. That’s why I’d buy the blue-chip business for my portfolio. Some risks it may face as we advance and include rising costs and a slowdown in consumer spending. 

FTSE 100 growth champion

Another company I’d buy is Rightmove (LSE: RMV). I think this is one of the country’s best technology firms. It owns the rightmove.com property portal, which is one of the most visited websites in the UK. 

Even though the property market has boomed over the past 12 months, Rightmove has still suffered disruption. As economic activity returns to normal levels, I reckon sales and earnings at the enterprise will stabilise. This predictability should allow management more scope to invest for growth and return capital to investors. 

The UK property market’s structurally undersupplied, and it doesn’t look as if that’ll change anytime soon. I think this will remain a tailwind for the enterprise for many years to come. That’s why I’d buy the FTSE 100 firm and rate it as one of the best shares to buy now.

Some challenges it may face in the future include a property market slowdown and competition from newer startups. 

International diversification

Schroders (LSE: SDRC) is one of the UK’s largest and most storied asset managers. It looks after more than £700bn of assets for clients worldwide, and this total is expanding.

According to the company’s half-year results, assets under management increased 6% during the first half of the year. 

The company’s main business is located in the UK, but it also has a presence in the US and Asia. As the global economy picks up from the pandemic, I think the demand for the group’s services will grow in all of these markets. With its global footprint and reputation, Schroders should be able to capitalise on this growth. 

The group also benefits from economies of scale, thanks to its size. Demand for higher-margin products helped the company report a 37% increase in profit before tax for the first half.

With further growth on the horizon, I think this is one of the best stocks to buy now for my FTSE 100 portfolio. 

Some risks it could face include competition and regulations, which could impact overall profitability. 

FTSE 100 international exposure

Flutter Entertainment (LSE: FLTR) has grown into one of the world’s premier gambling companies. Using experience gained in its home UK and Ireland markets, the enterprise has been diversifying into the US.

It’s already the number-one online sports betting operator in this market, and management believes there’s the potential for substantial growth in the years ahead. 

As a gambling company, Flutter might not be suitable for all investors. There will always be the threat of additional regulation for the sector, which could impact profitability. In the case of the US, authorities could decide to outlaw online betting again, eliminating the group’s growth story. 

Despite this risk, I’d buy the FTSE 100 company considering its growth track record and potential. Revenues jumped 99% in the first half of 2021. While past performance should never be used as a guide to future potential, this number suggests Flutter’s growth story is only just getting started. 

Best industrial share to buy

The final FTSE 100 company I’d buy is the industrial group Johnson Matthey (LSE: JMAT). This is another business with a UK and international footprint. The corporation manufactures chemicals and sustainable technologies for clients around the world. As you’d expect, its fortunes are tied to economic cycles as customers tend to place more orders in periods of economic growth. 

Last year was one of disruption for the group, but it’s experiencing a recovery in 2021. In its latest trading update, Johnson Matthey’s management noted that due to the strength it’s seeing in its end markets “we now expect at least mid teens growth in underlying operating performance.“

This suggests the enterprise will report strong growth this year as it capitalises on the economic rebound. This is why I think it’s one of the best shares to buy today for the UK recovery. 

The enterprise has warned that higher metals prices or other costs could impact its growth for the year, so this is a risk I’ll be keeping an eye on.