I’ve long been keen on speciality chemicals giant Johnson Matthey (LSE: JMAT). It released its annual results today, which were a bit ahead of market expectations, confirming my bullish view on this FTSE 100 group’s prospects.
Strong growth outlook
Underlying sales of £3.85bn were 7% ahead of last year at constant exchange rates. At the bottom line, underlying earnings per share (EPS) came in at 208.4p, a tad lower than last year’s 209.1p but above a Reuters consensus forecast of 207.99p. The board said it was increasing the dividend by 7% to 80p (versus a forecast 78.7p), “reflecting our confidence in the prospects of Johnson Matthey.” These prospects were reiterated in medium-term EPS guidance of a mid-to-high single-digit compound annual growth rate and an expansion in return on invested capital to 20% (from a current 16.4%).
The group’s largest division, Clean Air (operating profit £349m, 61% of group), has a strong growth driver from tightening environmental legislation across the world. Efficient Natural Resources (£158m, 28%) has market-leading technology focused on higher-growth segments. Health (£44m, 8%) is set to deliver breakout growth with the commercialisation of a pipeline of new generic products, expected to deliver operating profit of £100m by 2025. Finally, in New Markets (£17m, 3%), there’s huge scope, as the company commercialises a next-generation battery material that enables the rapid development of pure battery electric vehicles.
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At a share price of 3,425p, Johnson Matthey’s trailing price-to-earnings (P/E) ratio is 16.4 and the running dividend yield is 2.3%. The shares are now 7% higher than when I wrote about the company at the half-year stage. However, given the solid outlook for earnings and dividend rises and potential for explosive longer-term growth, I view the valuation as still attractive and continue to rate the stock a ‘buy’.
Favoured by demographics
Another FTSE 100 company that enjoys strong external drivers for long-term growth — in this case demographics — is medical technology giant Smith & Nephew (LSE: SN). The group is well balanced across three divisions: Sports Medicine, Trauma & Other ($1.9bn revenue last year, 40% of group), Reconstruction — knee and hip implants ($1.6bn, 33%), and Advanced Wound Management ($1.3bn, 27%).
EPS last year came in at $0.945, 14% ahead of the previous year, and the company increased its dividend by the same percentage to $0.35. At a share price of 1,375p and current exchange rates, the trailing P/E is 19.4 and the running dividend yield is 1.9%.
Long-term growth still in prospect
Earlier this month, it reported a weaker than expected Q1 and lowered its guidance on full-year revenue growth to between 2% and 3% from its previous 3% to 4%. I wouldn’t go as far as my Foolish colleague Royston Wild in labelling this as chilling news, but the performance in 2018 is certainly set to be muted.
Nevertheless, I view the shares as still very buyable, due to those long-term drivers for growth I mentioned earlier. Finally, I don’t see a recent change of chief executive after seven years as a cause for concern. Indeed, the incoming CEO is an industry veteran, who, in the words of Smith & Nephew’s chairman, “has demonstrated that he can energise businesses to deliver better performance and greater value to shareholders.”
