Synthomer (LSE:SYNT) shareholders, like myself, have had a bit of a shock today. The Synthomer share price is down 13.56%, which takes it down about 8.5% over a year. The company has reported no news today. The FTSE 100 and FTSE 250 are in the green, so the Synthomer share price crash cannot be blamed on market weakness. Perhaps it’s the entire basic materials sector, of which Synthomer is a part, that is having a bad day? No, some basic materials stocks are up, some are down, it all looks pretty normal there.
What has caused Synthomer to fall 14% today?
According to Reuters, analysts at Morgan Stanley have downgraded Sythomer shares to ‘underweight’ from ‘overweight’. I do not have access to Morgan Stanley’s note accompanying the downgrade. Various sources are reporting that the bank feels supply chain issues will weigh on the company’s ability to ramp up sales, which will weigh on earnings. A bleaker forecasted outlook also made the bank revise its share price target for Synthomer to 400p, which is below the current share price of 418p.
It appears that Morgan Stanley’s analysts have significantly moved the Synthomer stock price. Or, more correctly, investors reacting to today’s analyst downgrade have impacted the share price by selling their shares. Investors are perhaps fearful that Morgan Stanley’s bleaker future will come to pass. They might also be worried about other analysts following suit and issuing their own downgrades on Synthomer stock.
I am not selling my Synthomer shares
I am not rushing to dump Synthomer shares from my Stocks and Shares ISA. There are about 14 brokers covering the stock. Most of the 14 are recommending buying Synthomer. Analysts at Canaccord Genuity reaffirmed their buy rating on Synthomer just a couple of days ago.
Synthomer is a leading supplier of aqueous polymers. These are bought and used by other companies to make and improve products. As an example, Synthomer’s polymers find their way into latex gloves. Synthomer had a poor 2020, but so did most companies. And things have improved. Synthomer’s trailing 12-month earnings of £217m are currently higher than at any point in the last five years. Its operating margin of 14.5% during the previous 12 months is the best since 2016. All this has happened during challenging times for the global economy. After cutting its dividend during the pandemic, Synthomer has reinstated it. Over the last 12 months, Synthomer has paid 17.3p per share. The trailing dividend yield now is 4.1%. The consensus is that 2022 dividends will be 19.2p, making the forward yield 4.6%.
Sticking with the consensus
The trouble with reacting to analysts’ reports in isolation is that I would be buying and selling all the time. I would have bought last week and sold today if I behaved like this. Now a series of sell or underweight recommendations and price target cuts will make me think again. But, as of now, this is one analyst note, and the consensus is still overwhelmingly positive.
Perhaps there is something I am missing. Analysts have methods, models, and information sources that are beyond my capabilities. But, the next financial update from the company is not due until next year, when interim numbers are released. For now, that’s what I will be keeping my eye on.
