Is Johnson Matthey Suffering From Big Company-Itis?

Johnson Matthey (LON: JMAT) shares are down 5% this morning as they announce their annual results. Those results aren't good, it is fair to say. Revenue was up 4%, operating profit down 17%. We'd really rather see a bit more growth there and margins should of course be running the other way. Or at least we'd hope they would. It's possible to take some cheer from the underlying results also presented, which how operating profit up 21%.

However, the big thing is the sale of the battery materials business. That this business had gone wrong was announced back in November, which triggered a significant share price fall at Johnson Matthey. That's the point at which they said they were quitting the business and would be disposing of the assets from that adventure. Today's JMAT share price fall is about how bad that mistake was. They've sold out for £50 million plus a stake in EV Metals. The Canadian arm went separately for some C$10 million and change. The problem was that Johnson Matthey had this all on the books at £500 million. Which is quite probably what the business could have been worth if it had worked properly.

So, what needs to be examined is why didn't it work properly? The answer there relies upon gossip around the metals engineering world so it's not to be taken as gospel nor, perhaps, provable. But for what the jungle telegraph is worth it seems that Johnson Matthey suffers from Big Company-Itis.

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JMAT has some excellent engineers and has been at the forefront of a number of changes in varied metals markets. They pioneered the extraction of germanium from coal for example. Their platinum group metals refining operation is world class. Their process for refining catalytic convertors is exceptional. Their rhenium work for Rolls Royce and jet engines is beaten by no one.

But that's all relatively stable and large company-style work. Battery materials is a different world. The JMAT chemistry was excellent, as we'd expect (nickel, pgms and rhenium share a number of attributes) and there isn't anything wrong – so goes the gossip at least – with their processes, costs or anything else like that. What failed was time to market. Other people have filled that market niche in the time it took Johnson Matthey to come to market. They ended up trying to charge prime pricing for a new material when their actual production was behind the technological curve.

That is, the tech is fine, it was the development process of it that was wrong. From those who worked in it, the news is that it was, well, it was like working at a large company. Not at all like working at a start up. But the development of a new technology – what was being done – at a time of significant market change is and should be like working at a start up. There really is a reason why Lockheed put its “Sunk Works” entirely outside the normal management processes. Because engineering experimentation needs to be outside them.

This has a considerable knock on effect on any valuation of Johnson Matthey. If developing a new business line is beyond the current management style then we might assume that there will be no new successful business lines. JMAT is to be valued on its current business lines that is, not on what it might or could leverage off that knowledge and assets.