If there was one stock that made news this week, it was the emission reduction systems’ provider Johnson Matthey (LSE: JMAT). On Thursday, its share price saw a dramatic fall. As I write this Friday afternoon, it has recovered, but just a bit. As a result, compared to Wednesday, this FTSE 100 stock is still down by a huge 18%! This has also dragged down its annual returns. Compared to the same time last year, the company’s share price is now down by 8%.
Why did the Johnson Matthey share price crash?
The source of this damage is an entirely unexpected release from the company, which said that it is exiting its eLNO business. eLNO stands for its “nickel-rich advanced cathode materials”, which are used for manufacturing batteries used in electric vehicles (EVs).
I was taken aback on learning this because EVs are rising in popularity. And the fact that Johnson Matthey itself has been pretty bullish about them recently. It even started construction of an entire manufacturing plant in Poland specifically for the production of these materials.
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Justified explanation
The company explains that this U-turn is because the potential returns are not justified by the kind of investment required. This is for two reasons. One, it says that more competition is coming into this promising market, which is turning it into a “high volume, commoditised market”. And two, Johnson Matthey’s costs are higher than those of bigger players. So its margins could get squeezed as prices might drop and it lacks cost competitiveness.
Disappointing as this is, I do not think this should be taken to mean the company is out of the clean energy race altogether. It also has hydrogen fuel-cells as one of its lines of business. This is promising as well, and the technology is also being used in EVs, like those made by Nikola, for instance.
How does it make its money
In any case, for now Johnson Matthey’s biggest revenue generator is its Clean Air segment, which includes its emission control systems. This is followed by Efficient Natural Resources, which provides catalysts that help companies decarbonise their operations. Together they account for 89% of the company’s total revenues. New markets, on the other hand, which includes its battery materials’ business, accounts for only 9% of the total. Its share in profits is even smaller at less than 2%.
What I’d do about the FTSE 100 stock
Keeping this in mind along with the fact that Johnson Matthey has been a profitable company for a long time, I am not terribly disheartened by the latest development. If anything, it might just streamline its operations and make it more profitable in the future, something I have expressed concern about in the past. I do think that we should brace for weakness in its next results due later this month, though. In my view, these could reflect the extent of the financial challenge presented by the eLNO business that could have prompted the hasty exit.
But as a long-term investor, contrarian as it may sound on the surface, I like the stock now. In fact, I saw the dip as a buying opportunity and bought the FTSE 100 stock for 2022.
