Lithium prices may be bottoming after an 80% tumble. That's good news for Albemarle. By Jacob Sonenshine
Albemarle has a lithium problem. The metal, a key ingredient of electric vehicles, has plunged in price as electric-vehicle sales growth has slowed. Lithium prices are down more than 80% since peaking in 2022. And Albemarle, based in Charlotte, N.C., happens to be the world's largest producer of the stuff.
But now, lithium prices show signs of stabilizing. If that holds, Albemarle's battered stock could soon get a nice lift.
When the EV boom was in full force in 2022, lithium was trading at nearly $60,000 a metric ton. But as investors came to realize that growth would be slower than car makers had predicted, prices started falling. By December, they had dropped to just $9,000 a metric ton. (A metric ton is slightly larger than a U.S. ton.) Adding to the problem: Lithium miners, betting that demand was only going to increase, built new mines that are now starting to ramp up, adding more supply at a moment of uncertain demand. No wonder Albemarle's stock has fallen 67% since peaking in late 2022.
Things may start looking up. Lithium prices have risen 15% this year, topping $11,000 for the first time since December 2023. They could keep rising as Albemarle and other producers put a lid on additional expansions. In one notable move, Albemarle has delayed volume increases planned for its plant in Richburg, S.C. At the same time, any improvements in China's economy could lift demand for lithium.
In all, KeyBanc Capital Markets analyst Aleksey Yefremov forecasts a lithium price of about $21,000 by 2026. And if shortages develop, which could happen in 2026, prices could shoot even higher.
"We believe lithium pricing has bottomed," writes BofA Securities analyst Steve Byrne, who recently upgraded Albemarle to Buy from Neutral. The average Wall Street price target for the stock is $144, up from $114 now, and bulls see it going as high as $190, according to FactSet.
Albemarle produces hundreds of thousands of tons of the metal each year in countries like Australia, Chile, and the U.S. That lithium is used by chemical makers and EV manufacturers to make consumer electronics and EV batteries. The swoon in lithium prices, though, has hammered Albemarle's business. Analysts expect sales to drop 39%, to $5.9 billion, this year, while earnings drop 80%, to $4.45 per share.
With the recent firming of lithium prices, analysts are looking more kindly at next year's earnings. Albemarle's sales are expected to hit $6.93 billion in 2025. With selling prices rising and production costs holding about even, earnings could nearly double, to more than $8 per share. Any further jump in lithium price would only accelerate the gains.
Of course, Albemarle needs to get through the current electric-vehicle malaise. Demand for EVs is still growing -- it's just the pace of that growth that has needed a reset. In 2022, EV sales increased by 58%, according to the International Energy Agency, but that slowed to just 31% last year. Markets are trying to figure out how much of the growth slowdown is a result of broader weakness in consumer spending versus industry-specific problems, but it's likely that at least some of the issue is a function of the global economy.
There are less than 100 million EVs on the road today, according to Vista Global, versus more than a billion total vehicles, which means there is plenty of opportunity ahead for EVs. Electric-vehicle sales should grow by just over 16% annually from the end of this year through 2030, according to exchange-traded fund provider GlobalX. That's what Albemarle expects, too.
Demand for lithium industrywide should grow at roughly the same rate, to 3.3 million metric tons by 2030. That's why analysts expect Albemarle's sales will top $10 billion by 2028. While consensus estimates don't go beyond that year, KeyBanc analyst Yefremov's forecasts do, because "my framework is this market is going to grow," he says. Assuming the same growth rate through 2030, sales would reach over $14 billion, while earnings would reach about $28 a share.
That type of growth has yet to be reflected in the stock. The company's enterprise value, or market value plus net debt, stands at about 13.4 times the next 12 months' expected earnings before interest, taxes, depreciation, and amortization, or Ebitda -- well below its five-year average of over 18 times.
This stock could soon be recharged and ready to roll.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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April 26, 2024 21:30 ET (01:30 GMT)
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