These two companies are both champions in their respective industries and perhaps more importantly, they are both investing hundreds of millions of pounds in staying ahead of the competition.
Investing for the future
Speciality chemicals group Johnson Matthey is the largest secondary platinum group metals refiner in the world, which has both benefits and drawbacks.
The primary benefit, from an investment standpoint, is that the company has a leading position in its industry that is unlikely to be overturned any time soon.
However, the company also has to deal with the volatile prices of palladium and rhodium. This means earnings are volatile too. For example, during the first half of 2019, palladium and rhodium prices jumped by around 50%.
As a result, City analysts are now expecting the group to report a 5% decline in earnings for its current financial year, but a recovery is expected in fiscal 2021. The City is expecting earnings per share of 243p for fiscal 2021, up from 237p for the firm’s 2019 financial year.
What’s more important, in my opinion, is its spending on research and development.
The group invested £100m in research and development during the first half of its 2020 financial year, around 5% of sales. This spending should help the company defend its market share for years to come.
Croda is also reinvesting a significant portion of its profits back into the business. The company spent around £100m on research and development in 2018, approximately 7% of group sales.
At first glance, shares in Croda might look expensive, but in my view, the stock is worth its premium valuation.
Indeed, at the time of writing, the shares are dealing at a forward P/E of nearly 26, a five-year high for the group. However, the company is in the top 10% of the most profitable businesses trading on the London market today.
On top of this, the stock has grown earnings at a compound annual rate of 6% over the past six years and the firm also has a record of issuing special dividends to investors.
These metrics tell me that Croda is a highly defensive business and it looks as if it is going to stay that way as the group continues to reinvest profits to drive growth.
The bottom line
Both companies occupy niche sections of their respective markets, and this means that they’re both, to some extent, immune from competition. The sale of speciality chemicals is highly regulated, and customers are not going to change suppliers overnight just because they can get a better price elsewhere.
Put simply, as long as CRDA and JMAT continue to invest in their operations, I think they will remain leaders in their sector for many years to come. That’s why I would buy and hold these stocks for the next decade.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Croda International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.