Hang on to Johnson Matthey but keep an eye on US prospects

Caffyns may find the road ahead a lot tougher; Courts unattractive despite housing boom

Johnson Matthey, the platinum and chemicals group, has seen its shares tumble along with the market this year but over the past five years it has been a sterling performer, outperforming the rest of the market by a substantial margin.

It's a complicated business with interests in precious metals, supplying platinum for jewellery and catalytic converters in cars, pharmaceutical materials such as fine chemicals for drugs makers and a new fuel cell factory being set up to take advantage of the next big thing in fuel technology. With this mix it is hardly surprising Johnson Matthey has no direct peers on the London market.

But the group has been busy in the past year or so. This has seen it close a coatings factory in Staffordshire, with the loss of 300 jobs, while it acquired the Synetix catalyst division of ICI last month for £260m.

Yesterday's half-year results were a mixed bag with operating profits up 3 per cent to £99m though pre-tax profits were down slightly at £90m. Precious metal profits fell as the prices of palladium and rhodium tumbled. But the catalyst and chemicals business powered ahead with US car sales holding up and strong Asia sales offsetting weakness in Europe.

The key issues for this company are that continuing clampdowns on exhaust emissions should underpin the catalyst business while the heavy investment of £1.7bn in the past five years should now start to pay off.

The colours and coating business might be considered non-core as the other divisions grow.

The key threat to the business is its exposure to the US, which accounts for 40 per cent of profits. A downturn in the US car industry would be particularly bad news. The weakness in the dollar has also hit profits.

The most intriguing aspect of the business is the potential of the fuel cell technology, which is difficult to quantify. Assuming full-year profits of £190m some analysts have share price targets of more than £11. That might be a little too bullish but the shares – down 2p at 838p yesterday – look a decent hold.

Caffyns may find the road ahead a lot tougher

Caffyns, the car dealer based in the South-east of England, had a bonanza first half with profits almost tripling thanks to the sale of two luxury car dealerships.

The remaining businesses are also ticking over nicely with consumers continuing to take advantage of low interest rates in the UK. Car sales rose 4.6 per cent in the first 10 months of this year to 2.25 million vehicles in the UK.

Pre-tax profits in the six months to 30 September totalled £3.7m, up from £1.3m a year before. This included an exceptional gain of £2.35m largely from the sale of its Mercedes Benz dealerships in Dorchester and Salisbury.

Operating profits from continuing activities accelerated to £2m from £1.8m.

Storm clouds could be gathering, however. The company is facing new 'block exemption' rules from the European Union which come into force next October. Many believe they will force the industry to consolidate and could spark competition from non-traditional operators such as supermarkets. There is also the possbility of a consumer slowdown which would hit big ticket items such as cars.

For now, though, Caffyns reckons it is well positioned to turn out good results in the second half of the year although notes that much will depend on the economy.

The shares have had a good run, motoring up from 215p in spring 2000 to 440p yesterday, up another 20p on the day. But it is hard to see the economic backdrop getting any kinder for car dealers so there is probably little point chasing them too much higher.

Courts unattractive despite housing boom

Courts, the furnishings retailer, looked as badly sprung as a student's sofa yesterday when it reported worse-than-expected first-half results. The shares sank 18 per cent to 207.5p as the market digested interim losses of £4.1m compared with £2.8m in the same period last year. This is quite an achievement in a buoyant consumer market with UK house prices up 30 per cent in the past year. What on earth can have gone wrong?

Courts' management, led by the Cohen family, says it is all terribly simple if only those pesky analysts could understand the business properly. The problem is that hardly any of them bother following Courts these days.

The chief culprit has been the UK operation, which lost £6m in the six months to September. The company has been forced to drop the electrical divisions from its stores as the business has proved too competitive. But given the company's chairman, Robert Shrager, is a former finance director of Dixons the company should have known better than to take on the market leader in the first place.

The second problem is that its UK stores are too big, not something you hear too many retailers complaining about. It is now "rightsizing", by bringing in concessions to take up unwanted space. It is also embarking on a makeover of the UK stores including a brand relaunch scheduled for next summer. So far about 30 of the 100 UK branches have received the treatment with sales uplifts in excess of 8.5 per cent. This compares with a like-for-like sales increase of 4 per cent across all UK stores in the first half.

A further problem has been the international operation, which has branches in well-known retail hot spots such as Papua New Guinea (nine stores) and Fiji (24). These outlets act as credit issuer as well as retailer and an increase in orders has resulted in higher initial costs, though the revenue will come through over the lifetime of the credit deal.

Full-year profit forecasts have been cut to about £25m. Avoid.