Transformation Efforts Boost Margins, But Market Challenges Threaten Clean Air And Hydrogen Technologies

Key Takeaways

• Transformation and cost-reduction efforts are set to improve net margins and boost overall earnings.
  
• Aligning Clean Air and Hydrogen Technologies could open up cross-selling opportunities enhancing revenue growth.
  
• Weak market conditions and operational challenges in key segments, coupled with trade tensions, are impacting Johnson Matthey's revenue, earnings, and profit margins.

Catalysts

Engages in the clean air, catalyst and hydrogen technology, and platinum group metals (PGM) service businesses in the United Kingdom, Germany, rest of Europe, the United States, rest of North America, China, rest of Asia, and internationally.

• Ongoing transformation efforts aimed at increasing efficiency and reducing costs are expected to continue to positively impact net margins and overall earnings.
  
• Successful platform wins and building strategic customer relationships could stabilize or grow Clean Air revenues despite challenging market conditions in the automotive sector.
  
• A shift towards processing higher-margin industrial feedstock in the PGM Services segment along with more efficient refining capabilities could lead to an improved margin profile and earnings growth.
  
• The strategic alignment and integration of Clean Air and Hydrogen Technologies could open up cross-selling opportunities that support revenue growth in both segments.
  
• Cash generated from divestments, transformation savings, and a disciplined capital allocation strategy, including a significant share buyback, are expected to enhance shareholder returns and improve cash flow.

Johnson Matthey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Johnson Matthey's revenue will decrease by -33.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 6.2% in 3 years time.
• Analysts expect earnings to reach £219.7 million (and earnings per share of £1.92) by about January 2028, down from £529.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 4.2x today. This future PE is lower than the current PE for the GB Chemicals industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 11.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Johnson Matthey Future Earnings Per Share Growth

Risks

• Johnson Matthey's Clean Air sales have been impacted by weak end markets and previously announced platform losses, affecting revenue prospects.
  
• Hydrogen Technologies is facing a market slowdown with lower sales, impacting its near-term earnings and increasing its operating losses.
  
• In the Platinum Group Metals (PGM) business, first-half performance was affected by lower refining volumes and metal recoveries, reducing revenue and operating profit.
  
• The potential emergence of geopolitical trade tensions, such as tariffs between the US and Canada or Mexico, could create supply chain disruptions, affecting costs and margins.
  
• There is execution risk in the transition to the new Platinum Group Metal refinery, which could lead to operational issues affecting future cash flow and profit margins.

Valuation

• The analysts have a consensus price target of £17.62 for Johnson Matthey based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £24.0, and the most bearish reporting a price target of just £14.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £3.6 billion, earnings will come to £219.7 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of £13.4, the analyst's price target of £17.62 is 24.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.