After Earnings, Is Albemarle Stock a Buy, a Sell, or Fairly Valued?

Albemarle ALB released its first-quarter earnings report on May 1. Here’s Morningstar’s take on Albemarle’s earnings and the outlook for its stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $275.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Albemarle’s Q1 Earnings

• Lithium price changes: Albemarle reported its realized lithium prices were down 89% versus the first quarter of 2023. Albemarle sells roughly two-thirds of its lithium on index-reference prices, with the remaining one-third sold at spot market prices in China. Lithium spot and index prices bottomed during the first quarter, before slightly rising. We expect Albemarle saw its lowest prices in the first quarter, reflecting the cyclical low in the current lithium price cycle. We believe realized prices will likely be better sequentially in the second quarter.
• Lithium unit costs: Albemarle’s energy storage segment (lithium) total costs rose 60% versus the prior-year quarter. Some of the cost increase is explained by the 31% rise in volumes. The remainder is due to temporary issues from lower spodumene production at Talison and the company’s new plants ramping up. As volumes rise throughout 2024, we expect Albemarle’s unit production costs will fall, driving profit and profit margin growth even if lithium prices remain flat.
• Free cash flow: Because of falling lithium prices and high capital expenditures from lithium growth projects, Albemarle generated negative free cash flow in 2023, and it did so again during the first quarter of 2024. As Albemarle finishes its lithium growth projects, we expect free cash flow will be negative in 2024. However, the company has cut capital expenditures and is working to reduce operating expenses. We will see how Albemarle’s free cash flow evolves throughout 2024.
• Valuation: We think market sentiment is still very negative for Albemarle even though the stock rose after earnings. In our view, the market is assuming lower lithium prices for longer and potentially not giving Albemarle credit for its low-cost lithium production when its new capacity is running at full utilization, resulting in much of the bad news being priced into shares. Given our view of growing EV sales and rising lithium demand, we think lithium prices will rise in the back half of 2024. We point to rising prices as a catalyst for Albemarle’s stock price.

Fair Value Estimate for Albemarle Stock

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $275 per share. We assume roughly a 10% weighted average cost of capital. We use a multiple of 11.5 times midcycle EBITDA to value free cash flows generated beyond our 10-year explicit forecast.

The bulk of the growth will come from lithium. We expect contract lithium prices will rise in 2024. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $14,300 per metric ton (based on published indexes), down from $75,000 at the end of 2022 but up from the multiyear low of $13,500 in February. Prices fell due to slowing lithium purchases as a result of inventory destocking. However, as demand growth remains strong and outpaces supply, we expect prices to remain stable in the first half of 2024 and rise in the second half.

Read more about Albemarle’s fair value estimate.

Economic Moat Rating

We award Albemarle a narrow moat based on its strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either lower-cost brine evaporation or higher-cost mining of spodumene minerals. Albemarle has a cost advantage in lithium carbonate production due to its lucrative brine assets in the Salar de Atacama in Chile, which produces lithium at the lowest cost globally, excluding royalties.

Read more about Albemarle’s economic moat.

Financial Strength

Albemarle is in good financial health. As of March 31, management reported net debt/adjusted EBITDA was 0.9 times, well below management’s long-term target of less than 2.5. The firm plans to invest heavily over the next few years to expand its upstream and downstream lithium production volumes. It plans to expand its lithium refining capacity largely through the buildout of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher-cost regions like Australia.

Read more about Albemarle’s financial strength.

Risk and Uncertainty

We assign Albemarle a High Uncertainty Rating. The company’s biggest risk is volatile lithium prices. Prices could decline if EV demand grows more slowly than expected or new low-cost supply ramps up quicker than demand. New batteries, such as sodium-ion, could overtake lithium as the preferred energy storage resource.

Lithium production could ramp up more quickly than demand warrants if producers bring too much supply to the market. Further, new lithium production technologies could alter the cost curve in carbonate and hydroxide. Albemarle faces execution risk in ramping up its lithium production, which includes production delays and cost overruns.

Albemarle is also subject to political risk, especially in Chile. In President Gabriel Boric’s announced plan to nationalize lithium, the Chilean government would own a majority stake in all projects. If this occurs, Albemarle could be forced to sell a 50.1% stake to the Chilean government at a price as low as asset book value to extend its lease when it expires in 2043.

Read more about Albemarle’s risk and uncertainty.

ALB Bulls Say

• Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, among the lowest-cost sources of lithium production globally.
• Lithium prices should remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle.
• Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas.

ALB Bears Say

• Lithium prices will fall if new supply comes online faster than demand, weighing on profitability. Albemarle’s plans to increase its lithium production capacity would prove value-destructive amid lower prices.
• Albemarle’s bromine business will decline from weak demand for flame retardants as consumers shift from computers to less bromine-intensive tablets and smartphones.
• Chile’s plan to nationalize lithium could result in Albemarle being forced to sell a majority stake to the government at a price around asset book value, destroying shareholder value.

This article was compiled by Sokhoeun Noeut.