On March 25, 2025, BofA Securities made a significant decision regarding Johnson Matthey Plc (JMAT:LN) by downgrading its stock rating from "buy" to "underperform" and reducing the price target from 18.00 pounds to 17.00 pounds. This shift in outlook has raised eyebrows, especially given that the stock is currently trading at a P/E ratio of 4.84x, which some analysts, including those at InvestingPro, suggest undervalues the company.
Matthew Yates, an analyst at BofA Securities, expressed a mixture of concerns behind this downgrade that could potentially influence future earnings and stock valuation. One principal issue identified is the impending disruptions to Johnson Matthey’s clean air business, particularly concerning the automotive and truck production segments in North America. Yates noted that while these disruptions are not the expected outcome, the risks posed by taxes affecting vehicle production have contributed to declining investor confidence in the stock.
The concerns do not stop there; Yates elaborated on the company’s capital expenditure plans, expressing apprehension regarding a proposed upgrade project at the company's refinery. This project could substantially impact Johnson Matthey's free cash flow in 2026 and 2027, raising questions about the company's financing capabilities during these critical years. In addition, he revised his forecasts for organic growth within the company, aligning them more conservatively with current expectations.
In light of these issues, Yates also adjusted his forecast for Johnson Matthey's earnings before interest and taxes (EBIT) for 2027, lowering estimates by 7%. This adjustment reflects a shift from the previously optimistic consensus to a more cautious stance.
According to InvestingPro, there are eight additional insights regarding the company's earnings outlook. These insights focus on revenue projections and market momentum, which could influence investor sentiment concerning the stock. Specifically, the imminent expiration of regulatory guidelines, referred to as the 45Z rules, regarding clean transportation fuel could further unsettle potential customer investments. The ambiguity surrounding the future of these regulations may lead to hesitancy among clients, as demonstrated by recent events where Air Products canceled a sustainable aviation fuel project in California due to concerns about regulatory stability.
Yates's downgrade of Johnson Matthey reflects a broad timidity within financial markets regarding the industrial chemicals sector's growth trajectory against an uncertain regulatory backdrop. Investors are advised to remain vigilant and consider the evolving landscape before making investment decisions regarding Johnson Matthey.
This strategic recalibration by BofA Securities raises crucial questions about the future of one of the industry's key players in the clean air and sustainable fuel space. In an environment marked by profitability yet tempered by regulatory and production risks, Johnson Matthey will need to navigate these challenges wisely to regain investor confidence.
