Last week, I read a cautionary commentary in the Financial Times. This warned that the coronavirus-induced stock market crash could get worse before it gets better. It urged investors to look for survivors – rather than winners – for their share portfolios.
This reminded me of a remark from legendary investor Warren Buffett. The Oracle of Omaha argues that two key criteria should drive investors’ buying decisions. First, the quality of the business they are buying and, second, its current share price.
This led me to the financials of one high-quality company: Johnson Matthey (LSE: JMAT). While hardly a household name, this British business is a long-time member of the blue-chip FTSE 100, currently valued at just £3.75 billion.
As a world leader in specialist chemicals and precious metals, Johnson Matthey has a track record in scientific innovation dating back to 1817. Its outputs are used in the production of industrial chemicals, emissions controls, batteries, and medical and pharmaceutical products.
Its shares have suffered in the stock market crash
A year ago, long before the coronavirus ravaged stock markets, Johnson Matthey’s market value was almost twice its current level. In 2020, its shares are down more than a third (36% at the time of writing), which I argue puts them firmly in the FTSE 100’s bargain bucket.
Indeed, their recent decline leaves Johnson Matthey shares close to a nine-year low. I feel this is a once-in-a-decade opportunity to buy into a British success that will keep growing long after Covid-19 is history.
Bouncing back after the coronavirus is beaten
Now for the all-important financials. In 2018/19, total revenues reached £10.7 billion, higher than in any year except 2016/17. This produced a pre-tax profit of £488 million, the highest since 2014/15. Put simply, after a blip in 2017/18, this solid business resumed its long-term growth path.
Adjusted earnings of 228.8p in 2018/19 covered the 85.5p dividend a tidy 2.67 times. At the current share price of £19.72, this puts Johnson Matthey shares on a price-to-earnings ratio of 8.6 and a dividend yield of 4.3%.
These are attractive numbers for income and value investors alike. However, in a recent trading statement in the midst of the stock market crash, the board warned that Covid-19 disruption could knock £50 million from its trading performance. The firm has responded by cutting costs and maximising cash flow.
This is a Buffett business selling cheaply
In short, Johnson Matthey is a 203-year-old British success story. It operates a high-quality portfolio of diverse businesses, backed by a strong balance sheet and good access to liquidity to trade through these troubled times. Yet this stock market crash has crushed its shares, presenting an attractive buying opportunity for Buffett fans!
