The Investment Column: Golden future beckons for Johnson Matthey

Cars and US houses cast shadow over Tomkins; Land of Leather is no bargain
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The Independent Online

Johnson Matthey can trace its history to 1817, when Percival Norton Johnson set up a business in London for testing and valuing gold. These days, the company still refines gold, but it has branched out into other precious metals and, from there, into catalytic converters, which use platinum to neutralise harmful emissions from vehicle exhausts.

Our advice to readers when we wrote on Johnson Matthey shares in March was that they should "buy and tuck away". Given the stock is up 27 per cent since, we should ask if a little profit-taking might be in order. That, after all, is what investors did on the publication of the company's interim results yesterday.

But those results showed that the Johnson Matthey growth story is platinum-plated and still worth backing. Half-year profit before tax was up 20 per cent, with the catalysts division up 7 per cent in operating profit terms. The company is winning sales for a new generation of catalysts used on diesel cars - now about half the vehicles sold in continental Europe - and on heavy goods vehicles, where the environmental legislation is going to be progressively tightened for the rest of this decade.

Johnson Matthey is so confident in these future sales, it is bringing forward the opening of new factories, which will cost £30m extra this year, but ought to be applauded by all long-term holders of the shares.

Such is the company's track record in spotting new technological opportunities, investors should also be pleased with the slow but steady progress made by its teams working on components for fuel cells. As high oil and gas prices encourage the search for new sources of energy, this business will come into its own.

Yesterday's interims revealed a stonking performance by the ceramics business, which is selling products to tile manufacturers in southern Europe, justifying the company's decision to reject bids for the division - at least for now.

Even the pharmaceuticals division, which makes ingredients for drugs and which was below par yet again, was promising an improvement in the second half and new product launches next year.

The shares are now trading on 17 times current year earnings, and have a dividend yield of just 2.3 per cent, but that looks fair for the long-term growth on offer. Buy.

Cars and US houses cast shadow over Tomkins

When you consider that one of Tomkins' most significant customers has been teetering on the brink of bankruptcy, it is a wonder its financial performance is not much worse.

The company supplies car parts - belts, hoses and windscreen wipers, in the main - to General Motors, which is having to dramatically scale back production after a collapse in market share. Ford, another customer, is also performing poorly, and will probably have to bite the bullet of production cuts soon, too. New car parts account for 23 per cent of Tomkins sales, but the sale of similar products for industry has been growing, keeping overall sales from the "industrial and automotive products" division little worse than flat in the nine months so far this year.

And yesterday's third set of quarterly results actually beat expectations thanks to the building products division of the conglomerate. The US is building houses at a record rate of more than 2 million a year, and the residential building supplies market accounts for 12 per cent of Tomkins' sales. Expect the housing market to slow in the States next year, however, casting another big part of the business into the shade.

Tomkins shares went up 18.25p to 289p yesterday as investors digested the better-than-expected headline figures. But cash flows were a particular low-light and, although there was no change to expectations for the full year, the outlook is just as unattractive. Avoid.

Land of Leather is no bargain

In the Land of Leather, bargains abound. The furniture retailer claims that cow hide can't be had for cheaper than in its stores. Not if you want a classy leather sofa, that is.

Meanwhile its shares, which braved a sceptical investment community to list in the summer, look a bargain on classic investment metrics. The group even threw in an unexpected dividend when it reported its maiden interim results to the City yesterday.

The shares ticked up 1p to 152p, putting them on a price-earnings ratio for the year to March 2006 of 7.7 times, according to its broker, Investec Securities. That's cheaper than its only quoted rival, ScS Upholstery, and the dividend yield is a chunky 5.6 per cent.

Don't be fooled by the bargain-basement price tag. Land of Leather shares are distinctly last season. The interim figures showed a pre-tax profit decline of £700,000 to £3.7m. Sales rose by one-third, or by 7 per cent if you strip out new stores, and although it is no mean feat to boost sales when consumers are cutting back, they were driven by cut-price deals. Given the poor state of the sector, scepticism will abound. Avoid.

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