Albemarle Earnings: Cost Reductions Should Help Profits Amid Lower Lithium Prices

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $300.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Albemarle’s Earnings

Albemarle’s ALB fourth-quarter earnings report confirmed our view that the company is focusing on free cash flow generation over lithium volume growth amid the decline in lithium prices. As the company cuts operating expenses, this should support profits, and its plans to cut capital expenditures and optimize working capital should support higher cash flow generation.

Management’s market commentary also confirms our view that growing demand and slowing supply will lead to prices rising in 2024. Having updated our model to incorporate fourth-quarter results, we maintain our fair value estimate of $300 per share. Our narrow moat rating is also unchanged. Albemarle shares were up 4% at the time of writing, as the market reacted positively to the outlook. However, at current prices, we believe the firm’s stock is materially undervalued, trading at a little less than 40% of our fair value estimate.

We view current lithium prices as being at cyclically low levels. Prices are below the marginal cost of production. In response, higher-cost existing production has shut down, while new projects have been delayed by all major producers, including Albemarle. As electric vehicle sales grow and more utility-scale batteries are built, we forecast lithium demand will grow 10% to 1.1 million metric tons by the end of 2024. As total supply growth slows, we expect the market will move into a supply deficit, leading to prices rising, particularly in the second half of the year.