Albemarle Earnings: Trimming Valuation on Lower Near-Term Lithium Prices

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $190.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Albemarle’s Earnings

Albemarle ALB reported strong third-quarter results, as adjusted EBITDA nearly tripled year over year due almost entirely to higher lithium prices. The shares were up more than 3% on Nov. 5.

Why it matters: Albemarle’s average realized lithium price was over $19,500 per metric ton in the quarter. This is notable, as it is around our long-term midcycle estimate of $20,000 per metric ton.

• Energy storage EBITDA margins around 50% confirm our view that Albemarle is a low-cost lithium producer that can generate strong profits in a midcycle environment. Albemarle’s low-cost lithium production underpins our Narrow Morningstar Economic Moat Rating.

The bottom line: We’ve reduced our fair value estimate to $190 per share from $200. We view Albemarle shares as materially undervalued, trading nearly 50% below our fair value estimate and in 5-star territory.

• The shares are down almost 60% from their 52-week high, as lithium spot and futures prices have fallen. Prices now sit at roughly $13,000 per metric ton. However, we still see demand outpacing supply this year, moving the market closer to balance and driving prices higher.
• For investors who can withstand the volatility, we see strong upside relative to downside for Albemarle. The shares trade less than 10% above our downside scenario, which produces a fair value estimate of $90. This scenario assumes long-term lithium prices average $10,000 per metric ton, or half of our base case.

Between the lines: The reduction in our fair value estimate was driven by our outlook for lower near-term lithium prices. This reflects our updated near-term price forecasting, which is informed by futures prices.

• We also lowered our capital expenditure forecast as Albemarle is becoming more efficient in its sustaining capex. This partially offset the impact of lower lithium prices.