Livent Stock: Aggressively Growing Pure Lithium Play (NYSE:LTHM)

Lithium - ion batteries , metallic lithium and element symbol. 3d illustration.

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Investment Thesis

Livent Corporation (NYSE:LTHM), one of the top lithium-mining companies globally, has outperformed the market by a wide margin in the previous year and YTD, in line with its underlying commodity price, which has risen over 4.3 times within the past 52 weeks.

LTHM vs ALB price
Data by YCharts

In a previous Albemarle (ALB) article, I shed light on the bullish trajectory of the lithium market, which forms a significant portion of bullish sentiments for lithium stocks. That thesis still stands and covers the industry-specific aspects of Livent. This article focuses on the company’s growth initiatives in line with those already discussed macroeconomic factors.

Livent has leveraged the rising market pricing to fund its expansion, expecting to more than triple its Carbonate and almost double its Hydroxide production capacity. The aggressive growth of the company is a major reason for me to rate the stock as a “buy.”

The Company

Livent is a fully integrated pure-play lithium company, producing performance lithium compounds, primarily used in lithium batteries, specialty polymers, and chemical synthesis applications. The company operates out of Salar del Hombre Muerto, Argentina, with over 2 decades of low-cost lithium extraction experience.

Livent Revenue Breakdown

Livent Investors Presentation

Its largest market is in Asia, accounting for about 75% of its revenue, followed by about 15% in North America and 10% in Europe, the Middle East, & Africa. China is the largest customer of the company’s products, accounting for about 41% of sales in the most recent quarter (MRQ).

Livent recently upped its stake in Nemaska Lithium, Inc. (OTC:NMKEF), a fully integrated lithium hydroxide (LiOH) project, from 25% to 50% by issuing 17.5 million shares to expand its footprint and solidify its position in North America.

Growth and Expansion

Even though Livent Corp. serves various markets, it attributes a significant portion of its demand surge to the rise of electric vehicles (EV) and other energy storage markets. This is true for many lithium producers as the market demand for lithium has been directly correlated with EV demand growth.

S&P Global reports that US battery manufacturing capacity is expected to increase tenfold between 2021 and 2025, with companies planning to expand battery capacity this decade in the US and increase domestic battery production for EV product lines, including automakers General Motors, Ford, Tesla, and Toyota Motor North America.

Accordingly, Livent’s focus on LiOH, an integral part of the most successful Li-ion batteries, has been increasing, accounting for about half of the company’s revenues. This was a primary driver for Livent’s Tesla (TSLA) agreement, which ushered the stock into an upward trajectory in the late 2020s.

Battery-Grade Lithium Hydroxide Demand

Livent Investors Presentation

The positive market outlook and continued local government support led to the company resuming its capacity expansion projects in Argentina and the US, backed by long-term supply agreements. Subsequently, in 2022, it announced plans for second and third capacity expansions, aiming to improve its year-end projected capacity for lithium carbonate to about 100 kilo-tonnes and LiOH, including the Nemaska project, to almost 90 kilo-tonnes per annum, by 2030.

Livent Growing Capacity to Meet Future Customer Demand

Livent Investors Presentation

This capacity increase is directly in response to the aggressively growing EV market, where the lithium demand is expected to outpace the supply, as evident by the recent 69% YoY and 22% QoQ surge in US lithium imports. At the same time, lithium prices are currently through the roof, multiple times higher than in 2021.

Lithium Price Trends

Benchmark Minerals

According to S&P Global Commodity Insights, the price of seaborne lithium hydroxide at the end of April was $80,000 per metric ton CIF North Asia, more than double from $31,700/mt at the beginning of 2022 and almost 8 times higher than the $9,000/mt at the start of 2021. Meanwhile, lithium carbonate was priced at $75,000/mt, doubled from $33,800/mt at the start of 2022, and over 10 times higher than the start of 2021 from $6,350/mt. This perfectly aligns with the previously set bullish forecasts of the lithium pricing market.

Livent’s MRQ results already show significant growth with an over 50% topline growth and an EBITDA growth of over 6 times, indicating significantly high YoY topline growth in the company’s upcoming earnings reports if it maintains its sales volumes. This is in accordance with its recently revised 2022 revenue guidance of $795 million at the midpoint, about 40% higher than its previous guidance of around $570 million.

Livent Growth Grade

Seeking Alpha

Usually, I am not in favor of buying into companies that solely rely on a growth factor based on rising commodity prices because it is often an unsustainable growth. However, Livent has strategically leveraged the rising prices to fund its future growth with a CAPEX to sales ratio of over 37%, as it expects a forward operating cash flow to grow by almost 3x.

Valuation

LTHM stock trades at a ludicrous TTM earnings multiple of about 80x and a forward multiple of 18.5x compared to the industry medians of 13.3x and 11.2x. Similarly, all relative valuation measures paint the stock as overvalued, except the forward PEG ratio of 0.03x, which is 97% lower than the industry median of 1.21x.

LTHM vs ALB valuation
Data by YCharts

I used an EPS-based DCF model with a reasonable growth rate of 20% till 2032 and 10% after that, a 7.5% discount rate, a 2% terminal growth rate, and the annual expected EPS of $1.23, to calculate the stock’s FV of $35.4 per share, almost 55% higher than the current price tag and in the range of analyst estimates.

Livent EPS based DCF Model

Author

However, a major risk I see to the company is that its 10 largest customers accounted for about 69% of its MRQ revenue, including one customer accounting for 26%. This poses a significant threat to the stock as even if it stays recession-proof, a major hit to one of its major customers may reflect in LTHM stock and add unnecessary volatility. Even though it doesn’t seem to hurt the company’s long-term prospects, losing any of those customers would severely blow its earnings, turning the upside into a steep decline.

Conclusion

Livent is one of the world’s largest pure-play lithium compound producers with a proven track record. The stock has performed exceptionally well since the pandemic, outperforming the market and its peer, ALB.

Livent vs Albemarle price
Data by YCharts

Even though the company’s growth follows a generic industrial growth, its aggressive CAPEX moves mold healthier, longer-term prospects that are likely to generate significant returns.

In the short term, the rising prices are strong enough to result in a substantial upward revision of the company’s revenue guidance, which is likely to reflect positively on the stock value in the coming month.

Even if the recessionary market pressures the stock, the long-term outlook for lithium stocks is intact, and the growth initiatives by Livent make it a winning bet throughout the decade.

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