Morning Note: Market news and updates from Johnson Matthey and Medtronic.

Market News

US equity markets drifted lower last night – S&P 500 (-0.2%); Nasdaq (-0.6%). AI stocks slid following a tepid reaction from investors to Nvidia’s earnings. This morning in Asia, markets were mixed: Nikkei 225 (+0.3%); Hang Seng (flat); Shanghai Composite (-0.8%). The yuan consolidated near a four-month high after the PBOC set its fixing at the strongest level since June. The FTSE 100 is currently trading 0.2% higher at 7,495.

Minutes from the last Federal Reserve meeting showed policymakers united in a cautious approach to future rate moves, with any further hikes contingent on progress toward their price target. Fed officials stressed that while inflation had moderated in the past year, more evidence was needed for them to be confident that the 2% goal was in reach. The 10-year Treasury yield held steady at 4.41%, while gold moved up to $2,003 an ounce.

Ahead of Chancellor Hunt's Autumn Statement, Sterling trades at $1.2510 and €1.1488. Jeremy Hunt is expected to cut national insurance contributions and make a business investment tax relief permanent, a person familiar said. With the Conservatives trailing in the polls, the chancellor is seeking to strike a balance between cutting taxes and keeping a lid on inflation.

Oil trades at $82.40 a barrel. There’s a 35% chance that OPEC+ will implement deeper supply curbs at its upcoming meeting as an insurance against any potential weakness in the first quarter, Goldman said. Such a decision — which is not the bank’s base case — may “raise prices by a few dollars.”

Source: Bloomberg

Company News

Johnson Matthey has this morning released results for the half-year to 30 September 2023, which highlighted good growth in underlying profit against a challenging economic backdrop.  Good for the full year has been lifted and, in response, the shares are up 3% in early trading.

Johnson Matthey is a global leader in sustainable technologies, with a focus on catalysis and materials science. The company has simplified its portfolio, focusing on four businesses enabling the automotive, chemical, and energy industries transition to net zero: Clean Air; Catalyst Technologies; Hydrogen Technologies; and Platinum Group Metals (PGM) Services.

The group is in the process of selling non-core assets. The sale of its Diagnostic Services unit completed in September. Execution of the divestment programme is on track to deliver targeted proceeds of at least £300m by 31 March 2024,

The transformation programme has delivered £70m of cost savings to date and is on track for at least £150m annualised cost savings by 2024/25. Overall, the plan is to accelerate to high single-digit revenue growth at constant precious metal prices and currency rates over the medium term, with strong long-term growth, supported by a reliable dividend.

In the six months to 30 September, reported revenue fell by 11% to £6.5bn, driven as expected by lower average PGM prices. Underlying revenue, which excludes sales of precious metals to customers and the precious metal content of products sold to customers, fell by 1% at constant exchange rates to £1,967m.

By sector, the group’s largest division, Clean Air, remains focused on the improvement of air quality across the world. The division generated sales of £1,286m, up 2% at constant currency, while profitability improved as the group took actions to drive margins. In Catalyst Technologies, sales grew by 5% to £282m, with a significant 480 basis points uplift in the first-half margin. Elsewhere, PGM Services fell by 16% to £230m and Hydrogen Technologies grew by 61% to £37m.

Underlying group operating profit fell by 15% at constant exchange rates to £180m. The decline was due to lower average PGM prices, offset in part by higher prices and transformation benefits.

First-half capital expenditure was £157m, with key projects including investment in increased UK manufacturing capacity in Hydrogen Technologies and in resilience and efficiency PGM Services. The three-year cumulative capex guidance to 2024/25 has been reduced by 10% to £1.0bn.

Free cash flow fell from £133m to £78m. However, the group’s financial position remains robust, with gearing of 1.7x net debt to EBITDA at the end of September, in the middle of the target range of 1.5x-2.0x. The group has declared a half-year dividend of 22p, in line with last year.

Looking forward to the financial year ended 31 March 2024, the outlook for underlying performance has improved and the group now expects at least high single-digit growth in operating performance at constant precious metal prices and constant currency, versus at least mid-single-digit growth previously. This is underpinned by efficiency benefits of c.£55m in the year.

Source: Bloomberg

Yesterday afternoon, Medtronic released results for the three months ended 27 October 2023, the second quarter of its financial year to end-April 2024. The results were better than expected and the group raised its full-year guidance. In response, the stock was up 4%.

Medtronic is one the largest medical device companies in the world, with products to treat 70 health conditions, including cardiac devices, cranial and spine robotics, insulin pumps, surgical tools, and patient monitoring systems. 

During the latest quarter, revenue increased by 5.0% on an organic basis to $8.0bn, a touch better than the consensus estimate of $7.9bn. The group highlighted that underlying business fundamentals are strong with broad-based, diversified growth coming from multiple businesses and geographies. By region, US revenue grew by 3.0% in organic terms to $4.2bn, non-US developed market revenue was up 6.4% to $2.4bn, and emerging markets revenue grew 8.8% to $1.4bn.

The business is split into four ‘portfolios’: Cardiovascular (37% of FY2023 revenue); Medical Surgical (27%); Neuroscience (29%); and Diabetes (7%). During the latest quarter, Cardiovascular revenue grew by 4.8% in organic terms, with a high single-digit increase in Structural Heart & Aortic and mid-single digit increases in Cardiac Rhythm & Heart Failure and Coronary & Peripheral Vascular.

Medical Surgical grew by 5.6%, with a high single-digit increase in Surgical & Endoscopy and low single-digit growth in Patient Monitoring & Respiratory Interventions. Neuroscience grew by 4.2%, with a high-single digit increase in Cranial & Spinal Technologies and low-single digit organic increases in Specialty Therapies and Neuromodulation. Diabetes revenue was up 6.7%.

Medtronic continues to take action to improve the overall performance of the company, including streamlining its organisational structure and strengthening its supply chain. Most recently, the group completed the divestiture of its Renal Care Solutions business.

During the quarter, gross margin fell by 170 basis points to 65.9%, mainly due to inflationary pressures, while the 140 basis points decline in the operating margin to 25.2% was due to currency. Both margins were ahead of company expectations. EPS fell by 4% to $1.25 but was above the market forecast of $1.18. The group ended the quarter with net debt of $17.3bn.

The priority for capital allocation is innovation-driven growth investments while delivering consistent dividend returns to shareholders. The group is undertaking the largest planned R&D increase in its history (+10%) to accelerate long-term growth and capitalise on a long list of opportunities in next generation technologies such as robotics, AI, and closed loop systems.

There have been around 130 new product approvals in the last 12 months. Recent launches include the MiniMed 780G system with Guardian 4 sensor in Diabetes and the Micra AV2 and Micra VR2 leadless pacemakers in Cardiovascular. During the quarter, the group received US FDA approval for the Aurora EV-ICD system and Symplicity Spyra renal denervation (RDN) system. Over the next six months, the group expect product launches to ramp and contribute to revenue growth.

The group is also entering into minority investments, strategic partnerships, and incubators, with $1.5bn invested across 75+ companies as of October 2023, a slight reduction compared to three months earlier.

The company remains committed to returning a minimum of 50% of free cash flow to shareholders, primarily through dividends, and to a lesser extent, share repurchases. The company is a constituent of the S&P 500 Dividend Aristocrats Index, having increased its payout for 46 consecutive years. The latest annual payment is expected to be $2.76 per share, up 1.5%, and equating to a yield of 3.3%.

Guidance for the financial year to end-April 2024 has been raised once again. Organic revenue is now expected to grow by 4.75%, versus 4.5% previously, but still below the company’s long-term guidance. Adjusted EPS is expected to be $5.13-$5.19, a touch above the previous guidance $5.08-$5.16.

Source: Bloomberg