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

Albemarle ALB is set to release its first-quarter earnings report. Here’s Morningstar’s take on what to look for in Albemarle’s earnings and the outlook for its stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $275.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Albemarle Earnings Release Date

• Thursday, May 2, before the start of trading

What to Watch for in Albemarle’s Q1 Earnings

• Lithium demand: One of the key differentiators in our bullish outlook for Albemarle is our expectation that lithium demand will still grow at a double-digit pace in 2024. Bearish views point to an electric vehicle slowdown as the reason demand will see slower growth. We will look to hear whether any customers have changed orders, and management’s view of how lithium sales volumes to their battery-producing customers will progress in 2024.
• Realized lithium pricing change: On an index reference basis, lithium carbonate prices were down nearly 80% year over year during the first quarter. While Albemarle does not disclose lithium prices realized, it does report the percentage change. Most of Albemarle’s lithium is sold at prices that move based on index prices with a cap and floor feature. As a result, we will look for how large a year-over-year percentage decline Albemarle experienced during the quarter.
• Cost reductions and free cash flow: In response to falling lithium prices, management changed its strategy from investing in expanding lithium production volumes to cost reductions and generating free cash flow. We will see how this plan materialized during the quarter and management’s commentary on how it may evolve.
• New capacity ramping up: While Albemarle slashed capex and deferred new supply growth, it’s still finishing some new capacity expansions already under construction. We will look for an update on whether these projects are still on track to grow volumes in 2024.

Fair Value Estimate for Albemarle Stock

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $300. We assume roughly a 10% weighted average cost of capital and 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 growth will come from lithium. We expect contract lithium prices will rise in 2024. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $13,800 per metric ton (based on published indexes), down from $75,000 at the end of 2022, due to slowing lithium purchases as a result of inventory destocking. However, as demand growth remains strong and outpaces supply, we expect prices will stabilize in the first half of 2024 and rise in the second half.

Read more about Albemarle’s fair value estimate.

Economic Moat Rating

We award Albemarle a narrow moat based on its strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either lower-cost brine evaporation or 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.

Read more about Albemarle’s moat rating.

Financial Strength

Albemarle is in good financial health. As of Dec. 31, management reported net debt/adjusted EBITDA was 1.1 times, well below its long-term target of 2.0-2.5 times. The company plans to invest heavily over the next few years to expand its upstream and downstream lithium production volumes. It plans to expand its lithium refining capacity, largely through the buildout of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher-cost regions such as Australia.

We forecast EBITDA to fall in 2024 due to lower lithium prices. Combined with the lithium capacity expansion buildout, Albemarle’s leverage ratio would likely increase as EBITDA falls while debt rises. However, the company will issue $2.3 billion in convertible preferred equity. These proceeds will be used to finish the current wave of lithium growth projects and pay down debt. As a result, Albemarle’s balance sheet should remain strong even if lithium prices remain lower for longer. As a result, the company should be able to meet all its financial obligations, including dividends.

Read more about Albemarle’s financial strength.

Risk and Uncertainty

Albemarle’s biggest risk is volatile lithium prices. Prices could decline if EV demand grows more slowly than expected or 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 quicker 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. Albemarle 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 Chilean 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, 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, weighing on profitability. Albemarle’s plans to increase its lithium production capacity will prove value-destructive amid lower prices.
• Albemarle’s bromine business will decline from weak demand for flame retardants as consumers shift from computers to less bromine-intensive tablets and smartphones.
• 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 Liz Angeles.