Idea of the Day A Budget lifeline for Johnson Matthey

What: Johnson Matthey’s interim trade results failed to set the market alight this morning, even though profit growth was roughly in line with expectations and the dividend was bumped up by 6%. The shares have slipped some 3% on Tuesday, as investors eyed with caution the drop in free cash flow, and earnings were given a helping hand from a one-off decrease in expected pension service costs.

However, it’s Johnson Matthey’s Clean Air business, which includes its car batteries business, which is the biggest in Europe and has recently made big strides in developing new car battery materials, that is piquing our attention. The CEO said that it would continue to grow its battery business throughout Europe over the next 10 years, which could be a prudent move as Chancellor Hammond is set to announce spending measures in tomorrow’s Budget worth hundreds of millions of pounds to increase the number of electric car charge points and boost the sale of battery-driven cars in the coming years.

Johnson Matthey would be a clear home-grown winner if battery operated vehicles make it into the Chancellor’s red brief case tomorrow. The Chancellor is also under pressure not to penalise the owners of newer-build diesel vehicles, which have come under criticism for their polluting qualities recently. This could also boost Johnson Matthew due to its heavy duty catalytic converter business, especially if the Chancellor will only allow the cleanest diesel engines to be sold in the UK in the future.

How: We believe that we may see investors pick up Johnson Matthey on the dip in the next 24 hours, as today’s sell-off brings the monthly decline to more than 11%. With the government looking favourably on some important Johnson Matthey business units then investors may start to see JM as a bargain.

A word of warning, this is a volatile stock, as you can see below, so it is not for the faint hearted. Notwithstanding the volatility, we believe that the 11% sell-off in November may be too severe and buyers are likely to show interest, especially after Wednesday’s Budget. Upside potential includes 3271, the 38.2% retracement of the November decline and then the 50-day sma at 3332.