How to Ride the Lithium Craze

By 2030, global lithium demand is expected to surpass 2.4 million metric tons, double the forecast for 2025.

Estimates suggest we need $42 billion of investment to meet those numbers.

Although lithium demand softened in the last year, the forecasted supply shortages could push price to new all-time highs.

No wonder financial pros keep looking up Albemarle (ALB), on of the world’s top lithium producers.

With shares down almost 60% from their highs in 2022, we wondered if now was the right time to buy this beaten-down stock.

Albemarle’s Business

Technically, Albemarle is a specialty chemical company, not a miner. They produce lithium through evaporation (brine) or mining and then hit with acid and heat to separate lithium from the other minerals.

Source: Albemarle Investor Relations

Revenues are broken down into the following categories:

• Energy Storage (54% of total revenues) – Lithium products used for electric vehicles. 
• Specialties (32% of total revenues) – Speciality chemicals for various markets such as pharmaceuticals, construction, lubricants, and more.
• Ketjen (14% of total revenues) – The products and services for the catalyst market, including hydroprocessing, isomerization, and alkylation catalysts, as well as fluidized catalytic cracking catalysts and additives – basically stuff that improves the quality and performance of fuels and chemicals.

Financials

Source: Stock Analysis

As we mentioned earlier, the price of lithium has fallen dramatically, taking down shares of Albemarle with it.

Unsurprisingly, gross margins contracted, falling from 42% in 2022 to 29% in the trailing 12-month period.

This directly impacted their bottom line and free cash flow.

The good news is Albermarle is exceeding its goal of $170 million in productivity benefits for 2023 – initiatives they plan to build on in 2024.

Albemarle carries $3.8 billion in debt with about $1.6 billion in cash. It’s worth noting they retired about $1.1 billion of debt in 2021 by issuing additional stock, diluting holdings by 9.6%.

Given the $2.4 billion in cash generated from operations and the $1.9 billion in Capex, they’re in decent shape to keep paying roughly $186.5 billion in dividends or 1.1% yield.

Valuation

Source: Seeking Alpha

With lithium prices in the toilet, Albemarle is as cheap as it’s been in a long while.

The company trades at just 5x earnings and 7x cash. The only peer in that ballpark is Lyondellbasell (LYB) at 13x earnings and 6x cash.

Even the price-to-earnings growth (PEG) trailing and forward are below 1x, signaling a huge discount.

Growth

Source: Seeking Alpha

Despite the fall in lithium prices, Albemarle expects double-digit revenue and EBITDA growth next year, well in excess of any of its peers.

The only knock is their free-cash-flow declined as lithium prices fell.

Profitability

Source: Seeking Alpha

Profitability is a big concern for Albemarle investors. 

Their negative free cash flow margin certainly raises an eyebrow.

But their EBIT and net income margins still look great. And the returns on equity, assets, and total capital beat all their peers.

Our Opinion 10/10

We believe the decline has unfairly hit Albemarle’s shares in lithium prices.

Given lithium’s cyclicality and structural supply shortfall, we see the current price as an opportunity to get in on the cheap.

Yes, shares can be volatile, and it may take months or years to see quality returns. But this company is doing all the right things to ride an important megatrend.

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