Overlook The Panic, Embrace The Potential: Why Albemarle Is Nonetheless A Winner (NYSE:ALB)

Introduction

On April 8, I wrote an article titled “Filth Low cost: Why Albemarle Is My Favourite EV Inventory In A Horrible Market.”

Because it seems, the Albemarle Company (NYSE:ALB) has gotten even cheaper, falling 25% since then. The continued downtrend is so dangerous that it has pushed the inventory beneath its 2018 highs.

Whereas ALB has nonetheless returned 10.5% yearly since January 2004, it has returned simply 57% over the previous ten years – a horrible return, given the volatility buyers needed to undergo.

Typically, whereas I’m very proud of the best way issues are going (on the whole), I used to be useless improper about lithium and uncommon earth metals this yr. I can’t sugarcoat that.

Though I follow my name that miners are a greater wager than particular person automobile corporations within the EV area, I used to be very improper in regards to the timing of the restoration.

Because it turned out, lithium continues to be in a tricky spot.

On this article, I will elaborate on this and clarify what I make of the danger/reward going ahead.

So, let’s get to it!

Lithium Can’t Catch A Break

On June 24, Bloomberg wrote an article on the huge decline in lithium costs.

Lithium carbonate costs in China, the largest EV producer on planet Earth, have dropped to the bottom worth since August 2021, erasing the complete post-COVID surge.

Based on the article, the present decline comes after an 80% worth drop in 2023 as a consequence of a provide glut and slowing demand progress.

Furthermore, though costs have stabilized a bit, producers are nonetheless clearing inventories, which hurts demand.

Rising lithium manufacturing and expectations of a summer time lull are weighing on costs, in keeping with Susan Zou, an analyst at researcher Rystad Power. Regardless of the temporary rebound earlier this yr — underpinned by decrease provide round China’s Lunar New 12 months vacation interval and merchants’ speculative shopping for — upward drivers have “largely disappeared,” she mentioned. – Bloomberg

In the meantime, earlier this month, The Wall Avenue Journal got here out making the case that as a result of lithium is so essential in clean-energy applied sciences, there was an excessive amount of give attention to provide, inflicting an imbalance available in the market.

In reality, this is quite common when new applied sciences/traits emerge. As soon as everybody jumps on board, the danger/reward is “ruined.”

In China’s Qinghai Province, the place producers extract lithium from salt lakes, output is experiencing a seasonal enhance, including to stress on costs. Evaporation charges on the brine ponds are extra favorable throughout the hotter months, mentioned Daisy Jennings-Grey, head of costs at Benchmark Mineral Intelligence.

In western Australia, Liontown’s personal huge new mine is because of begin producing a uncooked type of lithium, referred to as spodumene, by the top of this month. – The Wall Avenue Journal

These developments have resulted in decrease anticipated provide progress, which is an effective signal for the market.

It additionally brings me to Albemarle.

It is Dangerous – However There’s Hope

On June 25, the information dropped that Lithium costs don’t justify investments in new vegetation for America’s largest lithium producer, Albemarle.

The present worth of the important thing battery ingredient is “regarding” and buyers shouldn’t put cash into lithium services at these market ranges, Eric Norris, president of vitality storage, mentioned Tuesday at an business convention in Las Vegas. – Bloomberg

Though bottoms take time, these developments often happen close to bottoms as an alternative of peaks.

To date, volumes have been a tailwind for Albemarle.

In 1Q24, for instance, the corporate reported $1.4 billion in gross sales and $291 million in adjusted EBITDA. The EBITDA result’s down 83% in comparison with 1Q23.

With pricing being the largest headwind, it noticed tailwinds from productiveness positive aspects and better volumes, as we will see within the overview beneath.

Concerning value financial savings, the corporate achieved greater than $90 million in productiveness and restructuring value financial savings within the first quarter alone and has a goal of over $280 million in productiveness enhancements for the complete yr.

It additionally made the case that the long-term outlook for lithium demand stays robust, pushed by the worldwide transition to electrical automobiles.

The North Carolina-based firm expects a 2.5x improve in lithium demand from 2024 to 2030. Again in 1Q24, it made the case that this supplies the necessity for brand new mining initiatives.

That is backed by analysis from the Worldwide Power Company, which wrote in a 282-page report in Might that offer is unlikely to maintain up with hovering demand if investments observe present local weather tips.

Based on the report (emphasis added):

Evaluation of introduced initiatives signifies that lithium uncooked materials provide grows to 450 kt Li round 2030 within the base case, once more greater than doubling the present manufacturing, and reaching 5 instances the manufacturing of 2020. Within the excessive manufacturing case, an extra 70 kt Li of uncooked materials provide may very well be made accessible available on the market. If introduced initiatives come on-line as deliberate, this quantity approaches the necessities within the STEPS in addition to within the APS in 2030, however is inadequate to remain on the 1.5 °C pathway. Past 2030, all eventualities require an additional funding in new provides to maintain tempo with the demand progress.

[…] There are lots of initiatives within the pipeline at their early phases of growth, however worth volatility could delay the initiatives developing, notably these exterior of incumbent nation producers, with implications for long-term provide and diversification.

The report additionally makes the case that lithium has the very best worth volatility amongst energy-transition minerals, which is sensible, given present developments.

What helps is that Albemarle is sitting on high-quality reserves, offering robust margins and progress alternatives.

Though it must be seen how the corporate’s progress plans have modified as a consequence of this difficult setting, the corporate has a number of progress initiatives, together with the Kemerton I and II services in Australia and the Meishan facility in China.

Within the first quarter earnings name, the corporate reported that Kemerton I had achieved the milestone of fifty% working charges for battery-grade merchandise. Meishan reached a 50% working fee for battery-grade materials.

Technically talking, the corporate might ramp up manufacturing to virtually 300 kilotons of lithium carbonate equal (“LCE”) by 2027.

It additionally advantages from above-average lithium grades, which offer draw back safety and pricing energy – particularly if demand comes again.

The corporate additionally has main manufacturing services in low-risk jurisdictions, which is more and more essential in gentle of worldwide geopolitical challenges.

As China at present dominates the EV provide chain, Albemarle has secular tailwinds to de-risk provide threat for Western producers.

It additionally helps that the corporate has all the time saved monetary well being a precedence. The corporate has an investment-grade credit standing of BBB, $3.7 billion in liquidity, and a long-term wager debt goal of two.5x EBITDA.

On prime of that, it has a 1.6% dividend yield, which comes with a payout ratio of simply 13.1%. Whereas its five-year CAGR is simply 2.6%, it has Dividend Aristocrat standing with 29 consecutive annual dividend hikes.

The second lithium costs backside, I count on dividend progress to speed up. I see no threat of dividend cuts within the years forward – even when the lithium worth decline continues.

The place’s The Worth?

The FAST Graphs chart beneath consists of FactSet EPS expectations.

To present you an concept of what modified in comparison with my prior article, the desk beneath reveals what expectations regarded like on April 5 and what they appear like now.

12 months EPS (Present) EPS (April 5) Y/Y Change (Present) 2024E $2.00 $3.53 -91% 2025E $5.70 $8.04 +185% 2026E $7.62 $9.44 +33% Click on to enlarge

This volatility is regular, as the corporate’s gross sales are extremely depending on lithium costs. As we will see beneath, in an setting of $40 per kg of LCE, the corporate generates $7.1 billion in income. At $15 per kg of LCE, that quantity drops to $3.3 billion (midpoint)

That mentioned, Albemarle at present trades at a blended P/E ratio of simply 8.5x. It was solely barely cheaper throughout the Nice Monetary Disaster.

A return to a 17.2x a number of by incorporation of present subdued expectations might pave the highway for a restoration to $131, roughly 34% above the present worth.

As such, I nonetheless follow a Robust Purchase ranking, as even a slight enchancment within the provide/demand state of affairs might gasoline an earnings restoration.

In different phrases, the danger/reward down right here is incredible – the volatility is not.

Though I can’t make the case that ALB is a must-own inventory, I’ve to say that if I have been lengthy, I might keep lengthy, as present big-picture developments trace at a bottoming course of.

Going into 2Q24 earnings, I am searching for extra intel concerning its future progress plans and Chinese language stock de-stocking.

For sure, should you’re often an investor in much less unstable dividend (progress) shares, please watch out right here. ALB might not be best for you.

Therefore, given my elevated publicity to unstable vitality commodities, I made a decision to chorus from including extra volatility to my portfolio.

Takeaway

I have been a giant fan of Albemarle, however the market has been brutal, and the inventory has dropped 25% since my April name.

Whereas the long-term outlook for lithium stays robust, the short-term volatility has been difficult.

Lithium costs have plunged, erasing post-COVID positive aspects, and Albemarle’s earnings have taken an enormous hit.

Nevertheless, the corporate’s stable reserves, strategic progress initiatives, and monetary well being present a powerful basis for a restoration.

At its present low valuation, I nonetheless see ALB as a powerful purchase with wonderful long-term potential, regardless of the tough experience forward.

Nevertheless, whereas its Robust Purchase ranking displays its potential, it’s not a “must-own” inventory because of the dangers that include it.

Professionals & Cons

Professionals:

Robust Lengthy-Time period Outlook: Albemarle is well-positioned to learn from the worldwide transition to electrical automobiles, with a 2.5x improve in lithium demand anticipated from 2024 to 2030. Development is slower than initially anticipated, however nonetheless anticipated to trigger provide shortages. Stable Monetary Well being: With an investment-grade credit standing, $3.7 billion in liquidity, and a low payout ratio, Albemarle is financially robust. Development Initiatives: Key initiatives in Australia and China put the inventory in a great spot to spice up output – in case it sticks to those plans. Excessive-High quality Reserves: The corporate’s high-grade lithium reserves present robust margins and draw back safety. Engaging Valuation: Buying and selling at a P/E ratio of simply 8.5x, Albemarle is considerably undervalued, providing a compelling threat/reward profile.

Cons:

Unstable Lithium Costs: The latest plunge in lithium costs has hit Albemarle’s earnings laborious, and market volatility stays a serious concern. Brief-Time period Uncertainty: Ongoing stock points and manufacturing will increase are pressuring costs, creating near-term headwinds. Market Sentiment: The inventory has considerably underperformed, falling 25% since April. It is going to take loads to deliver again confidence. Dividend Development Dangers: Whereas the present dividend is protected, additional declines in lithium costs might gradual future dividend progress.