Albemarle Earnings: Cost Reductions Should Drive Improved Results Amid Low Lithium Prices

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $225.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Albemarle’s Earnings

Our key takeaway from Albemarle’s ALB third-quarter results was management’s plan to reduce operating costs and capital expenditures in response to cyclically low lithium prices. Management announced that 2025 capital expenditures will be reduced by 50% from 2024. The firm is also implementing overhead cost reductions that should largely offset lower sequential realized lithium prices during the fourth quarter, with the majority of cost savings to be implemented in 2025. The capex and cost reduction initiatives were in line with our view of Albemarle’s response to low lithium prices. With our outlook largely unchanged, we’re maintaining our fair value estimate of $225 per share and narrow moat rating.

Albemarle shares were up 5% at the time of writing as the market reacted positively to management’s cost-reduction plan. However, we still view the stock as materially undervalued, trading at roughly 45% of our fair value estimate. Capex and cost reductions could drive profit growth and positive free cash flow generation by 2026 if lithium prices remain lower for longer. However, we point to our forecast for higher prices as the larger catalyst for shares.

Lithium carbonate prices remain at multiyear lows, around $10,000 per metric ton on an index basis. However, end-market demand continues to grow. Global electric vehicle sales are set to grow in 2024, and utility-scale batteries used in energy storage systems are seeing strong demand growth, driving lithium demand higher. In response to low prices, many producers, including Albemarle and its peers, are cutting supply. As demand growth overtakes supply, we expect the market will return to balance in 2025 from a current supply deficit. This should lead to higher prices, which we view as the strongest catalyst for lithium stocks.