I continue to believe anyone who is forecasting large electric vehicle [EV] growth over the next decade, should also weight the pros and cons of owning the fully integrated, low-cost lithium producer Albemarle (NYSE:ALB) in portfolio construction. Lithium batteries appear to have a stranglehold on the EV market that will be hard to break, absent a revolutionary energy storage breakthrough. Lithium is highly conductive with an extraordinarily light weight for a metal (the lightest metal on the periodic table, a chemical element with an atomic number of 3, next to hydrogen and helium gases). It’s a one-two punch for auto usage attractiveness other battery technologies cannot touch.
Unfortunately, the 2021-22 boom in lithium prices hit the pause button in 2023-24, sending Albemarle shares into a tailspin, losing -65% in price over the last 17 months.
My bullish argument today is considerable value is now part of the Albemarle investment equation, with its somewhat cyclical business sitting nearer the bottom of swings in its economic range. Part of this thesis is pictured in the above chart comparing stock price changes vs. fluctuations in the S&P 500 index. My valuation analysis suggests we are close to the same setups as the 2015 and 2020 lows in ALB pricing.
As a kicker for future returns, steady reinvestment of company cash flows into rising lithium production should provide a powerful boost to operating returns once lithium metal pricing enters a new bull phase. To me, Albemarle now represents a unique and successful growth at a reasonable price [GARP] selection. If past cycles/patterns repeat to the upside, ALB could morph into a big investment gainer by 2025. So, buying shares on the cheap today could prove a smart idea for long-term holders.
Albemarle vs. Lithium Industry Trends
The temporary drag on Albemarle’s stock has been a slight downshift in overall lithium demand forecasts into 2030 (down 10% from excited 2022 Wall Street projections), as EV sales have disappointed lofty predictions in western markets during 2023-24 (Chinese EV sales have remained super-strong).
As a result, the “immediate” shortage worries about lithium have faded, dropping metal prices from the panic buying frenzy of 2021-22. In fact, lithium prices are trading under the levels of seven years ago (down -85% in the Chinese Yuan marketplace per tonne from November 2022), which is a little mind-boggling, given about 25% of miners and producers globally are now losing money at current quotes.
The good news for Albemarle shareholders is, the company is one of the lowest-cost producers of lithium, and is still projected to be operationally profitable in 2024 using weak metals pricing. Part of this positive forecast revolves around the company’s fully integrated business model, involving both mining lithium then processing it into forms each individual battery manufacturer prefers per varying design specifications.
In terms of rapid long-term growth in output, Albemarle remains on track to deliver increasing lithium volumes at rates around +20% annually (between 2022-27), financed almost entirely from organically derived cash flows, with little net debt added. This should put shareholders in a terrific spot when lithium eventually recovers in price. You see, without a major price bump, the profit-incentive to construct new lithium mines and meet the approaching demand need for 250% of current annual industry supply by 2030 won’t exist (150% growth in lithium demand over six years vs. 2024).
Cyclical Valuation Bottom?
The most intriguing arguments for a cycle bottom in the Albemarle share price revolve around valuation data points. The two standing tallest in June 2024 are the trailing price to book value and sales readings. I have plotted them below. Over the past decade, this combination of factors has only been cheaper in 2015. Honestly, price vs. book value and sales is today lower than the important 2020 bottom. Both are a good 50% discount to 10-year averages.
Next, when we account for changing debt and cash levels, enterprise valuation ideas are lower than decade averages, but not the same bullish extreme with slightly higher debt totals and lower income levels over the past 12 months. EV to EBITDA on a forward basis is 13.3x, above the 2015 share price bottom of 9x and 2020 low of 11x.
The EV to Revenue multiple on a trailing basis of 2.1x is roughly the same as 2020 and 2015 lows, with a forward forecast of 3.0x still a 30% discount to 10-year averages.
Of course, the forward ALB numbers are using weak lithium prices for Wall Street projections. So, if lithium resumes its price uptrend to encourage the development of new mines and processing facilities, the fundamental valuation picture could be “understating” future financial output by Albemarle’s A+ business setup vs. the industry. In other words, it’s entirely possible the current $115 quote is a better “long-term” deal for shareholders than witnessed at the 2015 and 2020 price bottoms.
Slowly Improving Technical Momentum
Technical trading patterns do signal aggressive selling in shares has faded since late 2023. A very low 9 reading on the 21-day Average Directional Index (boxed in gold below) indicates a reduced volatility picture in trading, really the best balance in share supply/demand in years.
The Negative Volume Index, which measures net trading action on slower volume days, bottomed in November (circled in green). In my research, such often appears as overhead share supply is lower than normal. Plus, the popular On Balance Volume calculation has been zigzagging higher since December (circled in blue). In combination, these momentum indicators are experiencing the types of patterns found at or near major price bottoms.
Final Thoughts
Using Wall Street’s depressed lithium outlook for 2024, with only minimal price gains in the metal during 2025-26, Albemarle’s steadily expanding volumes brought to market and low-cost operating business are still projected to create solid growth again starting next year. My view is this is something of a worst-case scenario for ALB. Without a 50% to 100% jump in lithium next year, it’s likely the marketplace will face huge shortages in 3-5 years, with price eventually rising far above the peaks of 2022. Really, EV growth trends backing lithium demand have put Albemarle in a win-win operating situation.
What are the investment risks? Foremost in my mind would be lagging EV car sales, either from a deep and prolonged recession or a turn in consumer tastes away from saving the environment (slowing climate change). You can review on the 30-year chart below how recessions have affected company profit margins in a negative way.
The cyclical bullish news is after-tax, trailing income margins of 4% over the last 12 months are tracking near the worst performance over three decades. My question is how much pain (low lithium prices) can the industry stand and still grow mining/processing volumes dramatically in the future to meet EV production goals?
Other risks include possible political difficulties affecting its Chinese processing assets, or management paying too much for another lithium project or company that dilutes future upside for shareholders.
Effectively, the low lithium quote of 2024 may lead to a monster increase in future pricing, with super-strong related business returns coming from Albemarle just a year or two down the road. In some respects, the pandemic crude oil bust of 2020 similarly set the stage for materially higher energy prices a few years out. It’s a boom/bust price cycle repeat.
What kind of upside is possible in Albemarle? I am thinking a return move to $250-300 is possible over the next 2-3 years. With all-time highs in 2022 around $330, and EPS potential of $20+ with a double in lithium prices by 2026, projecting a fair value increase of +100% to +125% in ALB seems reasonable. Of course, if lithium metals pricing advances by +200% over the next 2-3 years (still half the level of late 2022), substantially better operating results and share values are possible.
At stock prices under $130, I rate Albemarle a Buy for long-term investors. I would upgrade my rating to Strong Buy on any dip below $100, if such appears alongside a large Wall Street selloff, generally into the autumn. Basically, I cannot rule out one last ALB selloff that forces remaining weak-hand stockholders to liquidate (the odds are around 50/50 in my view). I would be an aggressive buyer at that juncture.
Read the full article here