With its share price falling by 25% in the year to date, Johnson Matthey (LSE: JMAT) might now be on the radar of value investors.
I think it is worth investigating whether the stock is currently trading at bargain buy levels or if the shares are a dangerous value trap.
Johnson Matthey’s falling share price
The FTSE 100 index has been rocked by the Covid-19 pandemic. In the year to date, the index has fallen by 16%. Why has Johnson Matthey’s share price dropped by so much more than the index?
Johnson Matthey is a global leader in sustainable technologies, with a history that dates back over 200 years.
The company dominates the market. For example, one in every three new cars is fitted with an emission control catalyst produced by Johnson Matthey. The company’s catalysts stop approximately 20m tonnes of pollutants every year. Its products are also used in pharmaceuticals, chemicals, batteries, and medical products.
Despite its strong position in the market, the prediction is that the full-year group operating performance will not meet the expectations of the market. CEO Robert MacLeod stated that this is due to a “deterioration in some of our end markets”. However, he also noted that Johnson Matthey was “on track to deliver results in line with market expectations this year, prior to developments with Covid-19”.
Falling car sales following the coronavirus lockdown will affect Johnson Matthey’s revenue. Numerous automotive manufacturers paused productions, which lead to the business closing some of its Clean Air plants.
However, it is not all bad news for JMAT, with parts of the business more resilient to the economic fallout of coronavirus. These sections include its pharmaceutical, health, and agricultural operations. Although services for these sectors are continuing, there have been some delays in shipments.
Bargain buy or value trap?
As tempting as a major slump in share price looks, investors should ensure they are not falling into a value trap.
Johnson Matthey firmly falls into the FTSE 100 bargain buy category, I believe. The shares are trading at a price-to-earnings ratio of just over 9. As fellow-Fool Cliff D’Arcy points out, the Johnson Matthey share price is trading at a nine-year low. To me, there is now a rare opportunity to buy the stock at a discount.
I think the market has undervalued Johnson Matthey’s share price. The company has a strong balance sheet, with £250m of unrestricted cash and a £1bn revolving credit facility in place until March 2025.
Johnson Matthey also benefits from a diverse range of revenue streams. Hopefully, this will enable the company to ride out other macro-economic blips and might offer a prudent investor a wide margin of safety.
For a long-term FTSE 100 investor looking to maximise returns, I believe Johnson Matthey’s share price is a great bargain buy.
T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.