Johnson Matthey shares were having a bad summer even before the Volkswagen scandal. The company provides catalytic converters to the car industry, one of three suppliers globally. Those that go into diesel vehicles are six times more profitable to the company than the ones in petrol vehicles.
This is a business that has been in flux for several years, shifting from its original roots in precious metals to the provision of specialist chemicals. Yesterday marked the completion of the sale of its Alfa Aesar business for £256 million. This is engaged in chemicals distribution and is therefore not core.
Johnson Matthey says that the proceeds will be returned to investors. A sum of 148p a share is in the market, and a precise figure will come out when the company announces half-way figures in the middle of next month.
The problems pre-VW were slowing demand from Chinese industry for its catalytic products, which aid chemical processes in factories, and foreign exchange rates. The company was also hit by a fall in the value of precious metals, mainly platinum.
The first-quarter figures in July warned that if these last two factors continued to weigh on earnings, the full-year earnings would be off by £10 million, not huge in the context of a forecast figure in excess of £450 million at the pre-tax level. At their peak the shares were changing hands at 20 times earnings, which looks pricey. After the impact of the VW scandal, that multiple has come back to less than 14 on the price at yesterday’s close, up 20p at £24.68.
Analysts have struggled to assess the impact of VW on earnings, but it looks limited. So far the scandal has not spread to other carmakers supplied by Johnson Matthey. It is difficult at present to switch from diesel to petrol in heavy trucks, so this is only affecting the car market. The disappearance of diesel from the road, the worst case scenario, could knock 15 per cent off revenues and perhaps 11 per cent off earnings.
The upside is that Johnson Matthey will continue to supply petrol vehicles, so it would gain from any switch to these. Longer term, any concentration on greater emissions control would also be to its advantage. All the above suggests the fall in the shares has been overdone.
15% revenues from diesel cars
MY ADVICE Buy
WHY The share price fall appears to have come too far, with the market assuming too much damage from the Volkswagen scandal
Our second falling knife today, after Johnson Matthey, is Pearson. The shares have come from above £15 in March, though they added 25p to £11.52 yesterday on a positive note from Citi. This takes the view that, while near-term earnings growth will be limited, the business it is in, education, is countercyclical, because in hard times students tend to enrol at or stay in college, while cashflow is set to increase.
Some still remember the shock profit warning Pearson delivered at the start of last year. The shares have been sliding over fears of the dilutive effects of three disposals this year and the inevitable foreign exchange effects. Pearson did not help itself by admitting at the halfway stage that one of those disposals, and those forex movements, would take 3p off earlier earnings per share guidance of 75p to 80p this year.
To add to this, the company has lost a couple of assessment contracts in the US, which will clip revenues by another £100 million. The disposals were of the Financial Times, of course, half of The Economist and a provider of administrative software to schools, which will bring in upwards of £1.5 billion. This will be invested in the education businesses that are now the core of the group, in growing areas such as English language schools in emerging markets and online teaching.
The shares have fallen to a point where the earnings multiple is below 16, which is not exactly cheap, but the dividend yield is 4.7 per cent. This will provide support. Now might be a good time to take a (very) long-term view.
£1.5bn raised from disposals
MY ADVICE Buy long term
WHY Shares have support of decent dividend yield
In Cranswick’s first half, there was an acceleration of the positive trends from the second half of the last financial year: lower pig prices, which although passed on to its customers, stimulated demand for the meat and finished products such as bacon and sausages. There were a couple of other positives, though.
The Benson Park chicken operation, acquired in October, made its first contribution, providing an extra 5 per cent of revenues. A big supermarket that withdrew its trade was back and stepped up orders. So Cranswick’s sales rose by 10 per cent in the first half to the end of September and there was an improvement in the second quarter, when volumes rose by 13 per cent.
Cranswick supplies a quarter of its needs from its own herds in the UK and imports from the Continent, where prices are well below those here. There are signs of those prices ticking up a bit, but the outlook is good, with forward demand for Christmas encouraging.
The Cranswick story is about increasing exports to China and using its strong balance sheet to find further acquisitions. The shares though, up 93p at £16.89, are on 16 times earnings, which suggests the immediate good news is in the price.
10% rise in half way revenues
MY ADVICE Avoid for now
WHY Earnings multiple looks fairly high despite prospects
And finally . . .
The continued reshaping of wealth management has led to Rathbone Brothers snapping up the 80 per cent of a Cornish IFA that it does not already own, in the hope of gaining extra clients from this new distribution channel. The company is buying the remainder of Vision for up to £18 million. It has had the rest of the shares since 2012. Rathbones already has more than £500 million of assets under management for Vision clients. The company will have to remain independent, but the deal looks like benefiting both sides.
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