With Lithium Up 220%, Buy Market Leader Albemarle


Thanks to Fed interest rate increases, the stock market is likely to keep going down for the next few years. But some individual stocks are bucking that depressing trend.

Such rare companies lead an industry where strong demand exceeds supply — resulting in expectations-beating growth that seems likely to continue into the future.

One company that fits the bill is Charlotte, NC-based Albemarle whose stock price has gone up 21% in the last year as the price of lithium, which accounts for much of its revenue, has increased 220%.

That eye-popping price increase helped Albemarle to grow rapidly in the June-ending quarter and to boost its guidance — both exceeding investor expectations.

With lithium demand likely to exceed supply, Albemarle will be able to keep raising prices and to generate positive cash flow thanks to its low costs — sending its stock price higher.

(I have no financial interest in the securities mentioned in this post).

Albermarle Beats And Raises In Q2

Albemarle operates three divisions: lithium — with battery-grade lithium-producing plants in Australia, China, Chile and the United States, according to Zacks — bromine specialties and catalysts.

As of 2020, Albemarle — whose shares have risen at a nearly 14% average annual rate since its 1994 IPO — was the largest provider of lithium for electric vehicle (EV) batteries with the lowest costs in the industry, according to Morningstar.

In the second quarter of 2022, Albemarle beat expectations for the quarter and raised its guidance. According to Investor’s Business Daily, Albermarle CEO Kent Masters said, “[the company] is benefiting from strong demand and pricing trends, particularly for lithium and bromine. Over the past year, we have shifted our lithium contracting strategy to realize greater benefits from these strong market dynamics.”

Albemarle beat expectations for the quarter and raised guidance for the full year. Here are highlights:

  • Revenue up 91% to $1.48 billion — $20 million short of the consensus
  • EPS up 288% to $3.45 — 41 cents above consensus
  • Full year cash flow (FCF) positive in the last few months — reversing Albemarle’s earlier forecast of negative $1 billion, noted SeekingAlpha.
  • Full year revenue outlook raised 20% to a range between $7.1 billion and $7.5 billion — the midpoint of which is 121% higher than 2021’s revenue
  • Full year EPS guidance increased 52% to a range between $19.25 and $22.25

Lithium Pricing Power To Remain High

Why is Albemarle raising its outlook so much? Demand for lithium — which is used in batteries — is soaring thanks to EVs’ growing popularity. And lithium production cannot meet demand — sending prices skyrocketing.

Demand For EVs

Growth in new energy vehicles — including battery-powered and plugin hybrids — grew 63% worldwide in the first half of 2022 to around 4.2 million. Demand for EVs is particularly strong in China — where the market is expected to double in 2022 to six million.

In the U.S., demand for EVs grew 62% in the first half of 2022 to 414,000. Demand is expected to continue to increase due to the August 2022 passage of the the Inflation Reduction Act which “extends tax breaks for new EV purchases and seeks to transform the U.S. auto industry with incentives that would induce automakers to accelerate the production of zero-emission vehicles new energy vehicles,” according to Zacks.

Worldwide, global EV unit sales are expected to grow at a 19% average annual rate from 6.6 million units in 2021 to 26.8 million units in 2029. Meanwhile, the global EV market is expected to increase at a 24.3% average annual rate from $287.4 billion in 2021 to $1.32 trillion in 2028.

Insufficient Lithium Supply

EVs cannot operate without batteries — which use considerable amounts of lithium. Lithium production has not kept pace with demand. And in August, lithium production fell further behind because of record setting heat waves in Sichuan — which accounts for 20% of Chinese lithium production.

Many lithium producers there shut down for two weeks because China could not produce enough electricity to meet air conditioning demand. Power shortages in China could also limit production this winter when the cold weather hits, according to Zacks.

Soaring Lithium Prices

With demand exceeding supply, in the last year, lithium prices soared 220% to $71,315 a ton. Auto manufacturers — such as Ford and Stellantis — which are betting on the EV market, competed aggressively for long-term lithium supply contracts, according to Trading Economics.

Chilean producer Sociedad Química expects prices to rise. The company forecasts a “very tight lithium market” ahead with prices in the third quarter of 2022 to be higher than in the second quarter and to remain at that high level in the fourth quarter, noted Zacks.

Upside In Albermarle Shares Is Compelling

All these trends are bullish for Albemarle stock. The company will generate earnings before interest, taxes, depreciation, and amortization (EBITDA) of $4.5 billion in 2023 — making its stock a bargain at four times next year’s EBITDA. The catalyst is that Albermarle is “well-positioned to renegotiate high prices for its lithium business,” according to SeekingAlpha.

Albemarle is investing in more lithium production capacity which should enable it profit from growing demand — especially if prices remain high. Specifically, Albemarle is investing in its Kemerton plant in Australia, the expansion of its La Negra III/IV in Chile; accelerated production at its Silver Peak project in the U.S.; and the acquisition of a plant in Qinzhou China, reported Zacks.

Economic contraction and soaring lithium supply could undermine this bullish scenario. Were the economy to plunge, demand for EVs could fall short of the bullish forecasts. Were Chinese lithium producers to flood the market, prices for lithium would drop and so would Albemarle’s stock.

One advantage Albemarle enjoys is that its costs to produce lithium are among the lowest in the industry. According to Morningtar analyst Seth Goldstein, Albemarle “is the world’s largest producer of lithium, from which it generates the majority of total profits. Its Chilean operation is among the world’s lowest-cost sources of lithium.”

If Albermarle can negotiate higher prices, its profit margins will widen. If prices drop, it will be in a position to continue to make a profit as higher cost rivals hold their prices to maintain profitability — which could encourage customer to switch their business to Albemarle.

In early November, Albemarle is scheduled to issue a third quarter report. If it beats and raises, the stock will continue its upward journey.



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