Albemarle Stock: Very High Lithium Prices Likely To Stay (NYSE:ALB)

Lithium ion battery starts recharging electric

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Investment Thesis

Albemarle (NYSE:ALB) has been a very volatile stock, with its share price falling 20% from recent highs.

The biggest driving force behind Albemarle is that lithium prices remain near an all-time high, with lithium-ion battery demand remaining very high. Near-term this will continue to add support to its very high lithium prices.

This positive dynamic has seen Albemarle raise its revenue guidance twice in 2022. And we haven’t even crossed halfway through the year.

Albemarle is now expecting its revenues to grow by more than 80% y/y.

Here’s why I rate this stock a buy.

Albermarle’s Revenue Growth Rates Are Highly Cyclical

Albemarle revenue growth rates

Albemarle GAAP revenue growth rates

The graphic above shows Albemarle’s revenue growth rates. The revenue growth rates shown don’t account for the Fine Chemistry Services (“FCS”) business sold in June 2021. Here I’ve used Albemarle’s GAAP reported revenues.

Recall, back in February, when Albemarle guided for its 2022 revenues, it was guiding for a solid 30% y/y growth rate to $4.3 billion at the midpoint of its guidance.

Then, together with its Q1 2022 results, Albemarle upwards revised its revenues guiding for $5.4 billion at the midpoint. Then expecting to see its revenues increase by 64% y/y.

Now, last month, Albemarle once again upwards revised its revenue estimates for 2022, and it is now a track to grow by 81% y/y at the midpoint of its estimates, to $6 billion.

Accordingly, looking at Albemarle dispassionately, it’s clear that Albemarle is going to have a terrific 2022.

Albemarle’s Near-Term Prospects

Albemarle is a lithium and bromine business. As of Q1 2022, lithium made up nearly 70% of its total adjusted EBITDA.

Albemarle Q1 2022 segment-wise EBITDA

Author’s calculations, Albemarle Q1 2022

Note, the graphic above doesn’t exactly match Albemarle’s total adjusted EBITDA, as a small portion of its EBITDA is allocated to corporate. Yet, this is a close approximation, that I believe to be accurate.

Consequently, when it comes to discussing Albemarle, any focus asides from lithium is a distraction. The biggest driver of the story here is lithium. And if the lithium market pricing remains high, Albemarle will have a strong 2022.

In fact, it should be noted that Albemarle’s most recent guidance points to lithium’s adjusted EBITDA for 2022 to be up approximately 300% y/y.

Furthermore, given that Albemarle is a low-cost producer of lithium, this means that if lithium prices remain high, Albemarle will be well-positioned to benefit from this upside.

Next, we’ll turn our focus to discussing some bearish elements.

The Bearish Considerations

There are a few bearish considerations that are putting a lid on the share price.

One concern is that with higher interest rates, there’s less discretional income. Households that were previously considering buying EVs would now reconsider these purchases. Households may keep the older vehicle going for longer, rather than looking to fork out for a new EV.

With fewer EVs being sold, EV manufacturers will have to curtail production. And given that lithium is used in EV batteries, this could rapidly decrease lithium demand.

Albemarle - Lithium manufacturers

Albemarle May presentation

The other overhang is that lithium prices are very high right now. And lithium is a global commodity, with Albemarle itself having global exposure.

Consequently, with lithium prices so high, this has a knock-on impact that battery manufacturers and electric carmakers will be forced to increase the price of EVs, at a time when households may be pondering whether or not to defer that new EV purchase.

Yet another consideration could be that China looks to meaningfully ramp up lithium production and ends up flooding the market.

Consequently, there are many different ways that the high lithium prices we now witness may not be the same high prices we may end up seeing over the next 12 months.

ALB Stock Valuation – 14x Adjusted EPS

When it comes to its valuation, at the high end of its adjusted EPS guidance, Albemarle is priced at 14x adjusted EPS.

That being said, keep in mind that Albemarle doesn’t have any positive free cash flow. Yes, it has significant adjusted earnings, as it guides for $15 of adjusted EPS, but the vast majority of its earnings needs to be reinvested back into the business as capex.

On yet the other hand, lest we forget, the business is investing for growth and growing it is. And very fast, as it expects to grow its revenues by more than 80% y/y.

The Bottom Line

I’m bullish on Albemarle. Yet, I don’t think that this investment is going to be an easy layup. There are a few moving parts that will ultimately drive the share price higher. The fact is, the biggest driver of the business is the shy-high lithium prices.

And the likelihood that other market participants remain rational. For now, this isn’t a material concern, given that lithium prices remain so high. But at some point, this could be a concern that moves away from the fringes of the thesis to the center of the investment thesis.

All that being said, Albemarle has already twice upwards revised its full-year guidance. And we are not even halfway through 2022. Clearly, the business has a lot of momentum to its back. Whatever you decide, good luck and happy investing.

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