Albemarle Earnings: Falling Lithium Prices Drive Lower Outlook

Albemarle’s ALB third-quarter results and management’s updated guidance reflected the decline in lithium spot prices that will weigh on near-term profits. In response, management said it will review the company’s lithium growth investments with a goal to preserve financial flexibility. We think the likely outcome will be Albemarle slowing its lithium capacity investment, which is in line with how the company has historically operated during a lithium price downturn.

We updated our model to assume lower volumes and reduced capital expenditures throughout our 10-year forecast period. We also updated our model for lower profits in the nonlithium battery segments and lower near-term lithium prices. As a result, we reduced our fair value estimate to $300 per share from $350. Of the $50 reduction, $30 comes from our outlook for lower volumes, $15 is from our reduced forecasts for specialties and Ketjen segment profits, and $5 is due to lower near-term lithium prices. Our narrow moat rating is unchanged.

We view Albemarle shares as materially undervalued, trading in 5-star territory and at roughly 40% of our updated fair value estimate. We think the market is concerned that lithium spot prices will fall further to the end of 2023 and into 2024 due to oversupply concerns. We disagree and expect prices will rise in 2024 as battery producer inventory destocking runs its course. In recent days, multiple top-seven lithium producers have announced supply delays or production cuts or signaled a review of growth plans in response to lower lithium prices. Further, recent announcements from marginal-cost producers in China indicate supply is beginning to shut down in response to lower prices. We think this will result in the market balancing over the next couple of quarters. As demand grows, we see lithium returning to structural undersupply in 2024, leading to higher prices.