Amidst an all-time high in the S&P500, the spotlight now falls on the downtrodden commodity stocks. Albemarle Corporation (NYSE:ALB), a formidable force in American lithium mining, is one such contender. The company has weathered a brutal year, grappling with plummeting lithium prices, mostly attributed to subdued electric vehicle battery demand in a harsh macro environment. This deceleration in demand has sparked concerns about an expanding chasm between supply and demand, as mining companies race to scale up production to satiate the burgeoning secular demand.
Back in August of 2022, Albemarle’s stock ascended to an all-time high, breaching the $325 mark. Fast forward, and it has plummeted to a mere $116. A word of advice: navigating the volatile seas of commodity markets demands intestinal fortitude. However, within this turbulence also lies the potential for substantial returns if navigated astutely. Given that the lion’s share of Albemarle’s business hinges on lithium, its stock price is intimately tethered to lithium prices. Thus, the entwined fate of this iconic mining company and the lithium market is the focal theme of this discourse. I hereby propound a Hold rating for this entity. Should the stock witness another nosedive of at least 30%, or should the supply and demand tapestry morph into a more promising one, prospective investors might find themselves perched on the precipice of a compelling risk/reward juncture.
As such, just as the tides ebb and flow, investors need to stay ahead of the curve, keeping an unwavering eye on Albemarle’s dynamic performance in the percolating lithium market.
Diving into Albemarle’s Realm
Albemarle Corporation stands as a global purveyor of specialty chemicals, dispensing an array of essential ingredients that cater to sundry industries. The company operates within three business segments: Energy Storage (Lithium), Specialties (Lithium, Bromine), and Catalysts (Ketjen).
Revenue Rhythms
Albemarle’s primary revenue tributary stems from vending its products to clients, which find utility in a myriad of applications, including:
- Lithium-ion batteries for electric vehicles and grid energy storage
- Bromine-based products for fire safety, water treatment, and refrigerants
- Catalysts for oil refining, petrochemical processing, and industrial emissions control
In addition to direct sales, Albemarle extends contract manufacturing services to firms necessitating specialized chemistry or manufacturing processes for their products.
Cost Constellations
Albemarle’s cost cosmos revolves around research and development, manufacturing, and sales and marketing expenses. The company funnels significant resources into developing new technologies and processes, and for erecting and upholding its manufacturing facilities. Equally vital are sales and marketing expenses, vital for Albemarle to reach a broad spectrum of customers across diverse industries.
This panorama offers a glimpse of Albemarle’s global operations and yields a fundamental understanding of its lithium ventures.
An astute glance at Q3 of 2023 compared to the same quarter of 2022 might evoke a somber narrative; however, truth lies elsewhere.
In Q3 of 2023, Albemarle’s Net Income and Diluted EPS contracted by -66%. Adjusted EBITDA also receded by -62%, dragging margins down from 57% to 20%. These bearish portents paint a desolate picture, primarily an offshoot of the nosediving lithium prices. However, as they say, this is a mere patch on the quilt. Lithium prices in the preceding years have been exceptional and do not epitomize market norms. A dip, by all means, might seem precipitous, but it is far from cataclysmic. Contrastingly, the 9M conclusion ended on 9/30/22, boasting a 41% surge in Diluted EPS and a 38% uptick in Adjusted EBITDA. Amid this, however, looms a peril—the propensity of management to don rose-tinted glasses, presuming the prompt resurgence of high lithium prices and making superfluous prognostications about their enterprise.
Underscoring the Q3 comparison, Net Sales soared by 10%, showcasing sustained demand for Albemarle’s offerings, even within a tempestuous macro milieu. Albemarle’s cost structure for lithium production stands as paragon within the industry, enabling them to sustain lithium production amid low prices. This not only allows them to poach market share from rivals forced to curtail or cease production due to higher costs but also bestows an enviable vantage point in the lithium industry. As prices spiral upward, they stand to amass an expanding clientele and sales. Yet, this doesn’t immediately greenlight the entry of investors. As low-cost producers forge ahead, supply mushrooms and depresses lithium prices until demand inflates or supply dwindles vis-à-vis demand. Only when even the most cost-conscious producers commence shelving projects do we witness a nadir in prices. In such an event, it would be an opportune moment for investors.
During the Q3 Earnings Call, CFO Scott Tozier charted a guidance course for the full year:
Our adjusted EBITDA outlook hovers in the range of $3.2 billion to $3.4 billion. This translates to full-year EBITDA margins of 34% to 35%. Our full-year 2023 adjusted EPS outlook has been tweaked to a corridor of $21.50 to $23.50.
Scrutinizing Albemarle’s balance sheet, the company seems to be operating with a conservative disposition. The company operates with a leverage of 1.2x to 1.3x, nestled within acceptable thresholds. With the bulk of its debt
