Is 15% riser Synthomer plc a buy after beating expectations?
Chemicals company Synthomer(LSE: SYNT) is one of today's top risers after reporting strong results. Its performance during 2016 was ahead of expectations and shows that the company's business model and strategy have been sound. Looking ahead, more growth is on the cards. But is it too late to buy the shares after today's 15% price rise?
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Improving performance
During the first three quarters of the year, Synthomer experienced positive trends in its European and North American divisions. They continued in Q4 and the company saw better than expected results across all business segments. It also benefitted from further improvements within its refreshed strategy, which has focused on new product initiatives, greater efficiency, a strengthened procurement function and greater investment in business development.
Strong performance was also recorded in Asia and the Rest of the World. Those regions performed modestly ahead of expectations in the final quarter, with the competitive dynamics in the Asian Nitrile business continuing to evolve. This follows the introduction of additional industry capacity in the second half.
Similarly, the integration and trading performance of Hexagon PAC has progressed in line with expectations and is on target to meet expectations for 2016. Taken together, the overall performance of the company is expected to have beaten previous guidance for 2016.
Further growth potential
Of course, the chemical industry isn't a particularly consistent sector when it comes to profit growth. In the last five years, Synthomer has recorded falls in its bottom line in two of those years. It's a similar story with sector peer Johnson Matthey(LSE: JMAT). Its bottom line has fluctuated significantly and this means it has lacked overall growth during the period.
But looking ahead, both stocks are expected to experience upbeat performance. In the case of Synthomer, its earnings are forecast to rise by 4% in 2017, followed by 7% growth in 2018. Alongside a price-to-earnings (P/E) ratio of 16.5, this indicates further share price growth could be on the horizon. However, its sector peer offers superior value for money as well as better growth potential. Johnson Matthey is expected to record a rise in its earnings of 7% in each of the next two financial years. With a P/E ratio of 14.4, this indicates that it offers greater upside than its industry peer.
Of course, Synthomer could prove to be a sound long-term buy. As today's update showed it has improved its business model and is benefitting from better than expected performance in some of its key markets. This trend is expected to continue over the course of 2017, so it may yet beat its forecasts. However, since Johnson Matthey has a lower valuation, a wider margin of safety and superior growth prospects, it appears to be the more enticing buy of the two chemicals companies at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
