Yahoo Finance Every stock has a bad patch – and poor results have made this good company a bargain
All companies deliver disappointing financial and share price performance at times. A weakening economic outlook, tough trading conditions and operating difficulties are just some of the challenges that can prompt lower profits and falling stock prices.
Crucially, investors must ascertain whether an underperforming stock’s problems are terminal or temporary. In the case of the former, selling the stock at a loss can be the least bad outcome if it means avoiding further pain. For the latter, holding the stock, and even buying more of it, is a logical response that can lead to long-term capital gains.
Johnson Matthey has proved to be a thoroughly disappointing performer since it was first tipped by this column in June 2018. The sustainable technologies specialist, which is a major supplier of catalytic converters, has delivered a 48pc share price decline and underperformed the FTSE 100 by 40 percentage points.
Its financial progress has been underwhelming, with underlying earnings per share in 2022 just 2pc higher than in 2018. Over the same period, though, it has made major changes to its management team, including a new chief executive, and is in the process of refocusing its business model.
It has disposed of its health and battery materials segments to focus on clean air, catalyst technologies and hydrogen technologies operations, while maintaining its platinum group metals recycling business. These changes are being implemented alongside an efficiency programme that is expected to yield £150m in annual savings by 2025.
In Questor’s view, these changes leave a more focused business that operates in areas where it enjoys both a competitive advantage and the potential to capitalise on long-term growth as the world transitions to net zero. While the decision to sell its battery materials arm was not universally popular, there seemed to be little scope to earn above-average margins because of the market’s ongoing “commoditisation”.
Encouragingly, the company has a solid balance sheet with low debt that results in a net gearing ratio of just 35pc. And with its shares trading on an adjusted price-to-earnings ratio of around 9, investors appear to have factored in the prospect of difficult trading conditions as the world economy slows.
Although its recovery is unlikely to be brisk, as strategy changes normally take time to lead through to the bottom line, a wide margin of safety, solid fundamentals and growth potential as net zero policies are implemented give the stock sound recovery prospects. Hold.
Questor says: hold
Ticker: JMAT
Share price at close: £19.39
Update: Fever-Tree
This column’s advice to buy beverages company Fever-Tree has also proved wanting so far. The Aim-quoted stock has lost 60pc since our tip in March last year as tough operating conditions have led to three profit warnings since the start of the current calendar year.
In particular, the business has struggled to pass on higher costs to consumers during a period of rampant inflation. However, it should gradually find this task easier as it invests in production facilities in the US and Australia that will reduce sea freight costs, which have risen by as much as 50pc since the start of the year.
The company’s cost increases are also likely to moderate as supply chain problems, notably labour shortages at its existing international production facilities, ultimately ease.
Fever-Tree continues to enjoy a vast competitive advantage in the mixer category. In Britain, for example, it has 45pc of the market: more than 20 times the share of the nearest rival. And with various growth initiatives in adjacent product categories such as off-trade soft drinks and non-carbonated cocktail mixers across a wide range of regions, its long-term growth potential remains sound.
Clearly, a slowing world economy and weaker consumer outlook mean its shares are likely to be volatile. And with a forecast price-to-earnings ratio of 43, there are vastly cheaper opportunities available elsewhere following the stock market’s recent slump.
Less than two years have passed since our original recommendation, during which the company’s operating environment has been exceptionally tough. Therefore, Questor believes Fever-Tree warrants more time to deliver on its potential. Hold.
Questor says: hold
Ticker: FEVR
Share price at close: 973.5p
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