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Should I Buy Johnson Matthey Plc?

I’m out shopping for shares again. Should I add Johnson Matthey (LSE: JMAT) to my wish list?

Platinum-coated investment

When I last looked at platinum and specialty chemicals producer Johnson Matthey in December, the stock had suddenly lost its shine. A sharp fall in demand for precious metals hit platinum and palladium prices, cutting its operating profits by one-third. Trading at more than 16 times earnings, and I decided it was too expensive. That was then, should I buy it now?

Since last December, Johnson Matthey’s share price is up 27%, against 12% for the FTSE 100. Over two years, it has returned a sparkling 80%, against 26% for the index. One reason is that platinum has plenty of uses, a key component in cancer drugs, fuel cells, jewellery and, most important of all as far as JMAT is concerned, catalytic converters. The regulatory push to reduce emissions, both in Europe and the US, has helped drive its share price in recent years. Its Q1 interim management statement, published in July, showed “good” performance, with sales excluding precious metals up 13% at £745 million, and growth across all four of the company’s divisions. Underlying profit before tax was up 8% to £106 million.

CAT people

Management did warn that Q2 performance would be “slightly down”, primarily due to planned summer shutdowns in the automotive industry. The group anticipated “steady progress” in 2013/14, despite the loss of revenue under its new contract with Anglo Platinum, which comes into force from 1 January 2014.

If the motor industry does well, so should Johnson Matthey. The good news, therefore, is that US car sales hit a six-year high in August, with sales up 17% year-on-year to 1.5 million vehicles. Sales are up in the UK as well. If the recovery continues we can expect car sales to accelerate, and Johnson Matthey’s prospects to follow in its wake. Ever-tightening emissions regulation will turbo-charge that process. Johnson Matthey’s recent acquisitions appear successful, notably Forox in March, which should help it grow in the global petrochemicals market, and Axeon, bought last October. The integrated battery module specialist reported Q1 sales of £20 million, compared to just £1 million a year earlier. Johnson Matthey’s strong balance sheet adds to the sense of a well-run company that knows what it’s about.

Metal gurus

Last December, I said Johnson Matthey looked expensive at 15.8 times earnings. Well, now it trades at 19.9 times earnings. Forecast earnings per share (EPS) growth of 8% to March 2014 and 12% to March 2015 suggests there may still be scope for further growth. The yield is a lowly 1.9%, covered 2.6 times. Brokers like this stock. Deutsche Bank and Bank of America Merrill Lynch both have it as a ‘buy’, with target prices of £30.50 and £29.50 respectively. That isn’t far from today’s price of £29.93. A good company with bright prospects, but for me, still too expensive.

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> Harvey doesn’t own any shares mentioned in this article.