Back on the growth path after change in direction: Johnson Matthey and Bowater sailed through the slump and can speed ahead when the upturn comes

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Recession and the associated gloom in the stock market have given investors the chance to buy shares in companies which have changed dramatically for the better but have yet to reap the benefit in higher sales and profits.

Two large companies which have been transformed are Bowater and Johnson Matthey. Analysts are aware of what is happening and both shares are on demanding ratings. Nevertheless, if they perform in recovery as well as they have done through the slump, growth in earnings and dividends can still drive their share prices much higher.

Johnson Matthey hit near-disaster in the early 1980s when its subsidiary, Johnson Matthey Bankers, ran into difficulties. The first stage of rehabilitation was tight financial discipline. Stage two came with the appointment of a second new management team led by David Davies and Richard Wakering. They have used the group's world-leading role in marketing platinum and other precious metals as a base for building valued-added businesses.

Higher profits have been slow to come through because falling metal prices have led to a cyclical decline in commission earnings. But Johnson Matthey is now well placed for a period of strong earnings growth thanks to its leading position in three areas: as a supplier of catalytic converters to the car industry; as a manufacturer of anti-cancer agents based on precious metals; and as a supplier of specialised products to the world's electronics industry.

At 453p, the prospective PE is 18 if 1992 pre-tax profits reach pounds 70m ( pounds 66.8m). But analysts have pencilled in a solid advance to pounds 80m next year, possibly launching a sustained period of above-average growth.

When a new management team arrived at Bowater in 1987, led by Norman Ireland and David Lyon, it inherited an unfocused mix of activities. They didn't know much about packaging but they did know how to run a business. Since their arrival, the emphasis has switched from return on capital to raising profit margins and cash generation. More than pounds 300m has been generated through disposals and a series of equity fund calls, and more than pounds 1bn has been spent on buying new businesses - mainly in the areas of specialist printing and packaging and coated industrial films.

The results of the new approach have already been impressive. Despite a tiny drop last year, pre-tax profit margins have climbed from 4.7 per cent to 8.6 per cent since 1987. The aim is to increase the margin by a percentage point a year, and a level between 10 and 12 per cent looks a reasonable goal.

At 839p ahead of an imminent one-for-one split, the shares are rated at over 17 times expected 1992 earnings, perhaps falling to 15 if expectations for 1993 are vindicated. But investors looking for a well-managed large industrial concern with a clear growth strategy for the 1990s should find Bowater worth the price.

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