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

After a big drop in Albermarle’s stock and amid questions about Lithium demand, here’s our outlook.

A logo sign outside of a facility occupied by the Albemarle Corporation.

Albemarle ALB stock is down 62% over the last 12 months. Ahead of its fourth-quarter earnings report, here is Morningstar’s take on what to look for in Albemarle’s earnings and the outlook for its stock.

Key Morningstar Metrics for Albemarle

Albemarle Earnings Date

Thursday, Feb. 15, before the stock market opens.

What to Watch In Albemarle’s Q4 Earnings Report

  • Lithium demand: Lithium spot prices have fallen over 80% since late 2022 as the market returned to balance from being undersupplied. There is some concern about slowing electric vehicle sales leading to slower growth in lithium demand. What Albemarle says about orders from battery and automaker customers will be another data point with which to gauge demand.
  • Realized lithium prices: Albemarle changed to a variable price contract structure, with most contracts featuring a price cap and floor. In an environment of lower lithium prices, we will look to see how these contracts are working. In particular, we will want to hear whether contract floors are holding up or if Albemarle is adjusting the contract prices down, similarly to what the company did during the last pricing downturn.
  • Lithium capacity growth: In January, Albemarle announced a plan to slash capital expenditures to focus on generating positive free cash flow in the lower-price environment. This included delaying some new lithium capacity growth projects. We will look to see management’s new long-term volume growth plan after including the delays.
  • Capital allocation: We will look for an update on capital allocation and see whether the company will consider share repurchases if it can generate positive free cash flow exceeding dividends.

Albemarle Stock Price

Fair Value Estimate for Albemarle

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $300 per share. For our fair value estimate, 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 horizon.

The bulk of the firm’s growth will come from lithium. We expect contract lithium prices will rise on average in 2023. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $23,000 per metric ton (based on published indexes), down from $75,000 at the end of 2022 due to slowing purchases stemming from inventory destocking. However, as demand growth remains strong and outpaces supply, we expect prices will rise in 2024.

We believe prices for lithium carbonate will remain well above our forecast at $12,000 per metric ton through the rest of the decade. Based on our price elasticity analysis, we think index prices will average a little over $30,000 per metric ton during that time. We expect high-quality lithium hydroxide used in long-range batteries will continue to sell at a premium to carbonate, reflecting higher conversion costs.

Albemarle Stock vs. Fair Value Estimate

Read more about Albemarle’s fair value estimate.

Economic Moat Rating

We award Albemarle a narrow moat thanks to its strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either the lower-cost evaporation of brine or the 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. Albemarle has a long-term contract through 2043 with the Chilean government to extract around 80,000 metric tons of lithium per year.

Read more about Albemarle’s moat rating.

Risk and Uncertainty

We assign Albemarle a High Uncertainty Rating. Its biggest risk comes from volatile lithium prices. Prices could decline if EV demand grows more slowly than expected, or if 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. The company 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 51% stake to the 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, which are 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, which will weigh on profitability. Albemarle’s plans to increase its lithium production capacity will prove value-destructive in the wake of lower prices.
  • Albemarle’s bromine business will decline from weak demand for flame retardants as consumers shift from computers to tablets and smartphones, which are less bromine-intensive.
  • 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 Tom Lauricella.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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