There’s little doubt today that clean energy solutions are the future. And there are plenty of stocks in the segment to choose from. I can buy shares of a backer of renewable energy projects, for instance.
Or I can buy an electric vehicle (EV) stock. I could also look among miners that are suppliers for the clean energy industry.
Today, however, I would like to talk about FTSE 100 manufacturer Johnson Matthey (LSE: JMAT). Its share price is up 2.4% as I write, making it one of the biggest index gainers today.
Why this renewable energy stock is up?
Its share price rose on the news that it has agreed to build a plant in Finland with the Finnish Minerals Group. It will manufacture cathode materials to be used in EV batteries.
This news follows Johnson Matthey’s earlier initiatives to build a factory in Poland for EV batteries as well.
Besides this, the FTSE 100 company already manufactures pollution caps for cars under its clean air segment. On its website, it says that one in every three cars carries an emission control catalyst made by it.
Recovering from 2020
Not all is hunky-dory for the company though.
It did suffer a setback in the past year, driven by lower demand for its clean air (or its emission-control) segment. Its reported operating profits were down by 74% because of this for the half-year ending September 30 2020.
However, in some good news, it has now reported a recovery in the segment. In its trading update for the financial year ending March 31 2021, Johnson Matthey said that the segment’s operating performance for the year will be only “moderately below” the year before.
Prospects for Johnson Matthey
This means that we can expect the company’s results to mend from this year onwards. I think Johnson Matthey is well placed to expand as the EV market really takes off as well. At present EVs still form a tiny proportion of the global market, but in another decade they are expected to be a substantial contributor to automobile sales.
With the US Biden administration’s focus on green energy and electric vehicles, I think this development may be closer to reality than we can imagine right now.
Pricey stock, or is it?
The challenge with buying this FTSE 100 stock is that it looks quite expensive in price-to-earnings (P/E) terms, with a ratio of over 60 times, with the exact level depending on the earnings measure chosen. A lot of FTSE 100 stocks look quite pricey these days, but Johnson Matthey’s valuations are ahead of many.
I think, however, that as the world goes back to normal and its profits come back to their earlier levels, this renewable energy share will look far more affordable. My quick estimates show that if its earnings per share were to rise back to their 2019 levels, the P/E would be closer to 30 times. That does not look quite as difficult to digest for me as its current earnings ratio.
I think the Johnson Matthey stock is a buy if I’d like to have renewable energy shares in my portfolio.
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Manika Premsingh 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.