The Johnson Matthey (LSE:JMAT) share price isn’t having a good month. After plummeting around 20% a fortnight ago, the stock opened again today in a downward spiral following the release of its half-year earnings report. Combined, these declines have pretty much wiped out all of 2021’s gains. And consequently, the 12-month return from this business is a mediocre -4%.
But around an hour later, most of this morning’s losses were reversed. So, what’s going on?
Johnson Matthey’s share price versus earnings
I’ve previously explored this business. But as a quick reminder, Johnson Matthey is a specialist chemical and technological solutions company. Its purpose is to help industries such as oil & gas, pharmaceuticals, and agriculture reduce their impact on the environment without compromising performance.
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Earlier this month, management made a surprise announcement that it was abandoning its investments in the highly anticipated electric vehicle battery sector. After an internal review, the company discovered that the battery metal market is becoming highly commoditised. And it simply can’t compete in a way that would create long-term value for shareholders.
This announcement was responsible for the Johnson Matthey share price crash earlier in the month. And today, the impact of this decision became clear in the latest earnings report. Underlying operating profits actually came in 94% higher than a year ago, reaching £293m. However, all of this gain was wiped out by a £314m impairment of its axed battery metal operations. And if it wasn’t for the one-time earnings of £44m from a win in a legal battle, operating profits for the last six months would have been negative.
Needless to say, this isn’t a pleasant situation. So, seeing the stock take an initial hit on this report is hardly surprising.
Taking a step back
This sudden capital expense shock seems to have initially spooked investors resulting in a near 10% drop at one point this morning. However, the Johnson Matthey share price quickly got almost back to Tuesday’s closing price once investors calmed down and took a closer look at the report.
Seeing operating profits hammered isn’t a pleasant sight. But the catalyst was a one-time impairment charge. Meanwhile, the firm’s top line has been busy expanding by 23%, with revenue reaching £1.9bn. This growth is primarily being driven by its Clean Air and Efficient Natural Resources divisions. And given the government incentives for corporations to lower their carbon footprints, it’s not surprising to see the demand for Johnson Matthey’s products rise. What’s more, it doesn’t look like management thinks demand will drop any time soon since it just raised shareholder dividends by 10%.
There are still some headwinds to come with supply chain disruptions causing problems for its automotive customers. And swings in foreign exchange rates is expected to adversely impact the full-year bottom line by around £15m. But all things considered, the business seems to be doing well.
Final thoughts
The last time I looked at this firm, I added it to my watchlist to wait for the half-year report released today. Now I have a much clearer picture of how things are going. And I feel the Johnson Matthey share price can make a solid recovery long term.
Having said that, I’m personally not interested in adding this stock to my portfolio. Why? Because I think there are far better opportunities to be found elsewhere.
