One of the great lessons that emerged from various gold rushes in 19th and 20th centuries it was this: selling supplies to miners instead of panning for gold.
At the 21St century, a new gold rush focuses on electric vehicles. Over the past two decades, dozens, if not hundreds, of companies have spent billions of dollars trying to build competitive, emission-free cars and trucks.
Tesla Inc. (TSLA, Financial) seems to be leading the race now, but can it continue to hold that position? Major domestic and foreign automakers are building their own models, while small private companies are creating niche vehicles.
While we don’t know which of these companies will survive and thrive for decades to come, we can hedge our investment bets.
Albemarle Corp. (ALB, Financial) is one of the largest, if not the largest, lithium producer in the world. This chemical is an essential ingredient for electric vehicle batteries and the history of the holder.
In 2022, the company operated through three segments: Lithium, Bromine and Catalysts (the categories have since been changed and renamed). Based on the Q4 and full year results release, Lithium is by far the biggest contributor to revenue. Last year, it accounted for $5 billion of the company’s total sales of $7.32 billion.
What’s the problem?
GF’s value line warns that Albemarle is a potential value trap, a value that looks attractive at a low price but may not survive for long.
After reaching a high of $325.38 on November 11, 2022, it has fallen more than $100 in just under five months. As of midday on Thursday, April 6, it was trading at $195.91.
This loss of investor confidence reflects the belief that Albemarle is simply a lithium producer and the price of lithium is falling.
The price has dropped for several reasons. First, recent high prices attracted new suppliers, increased production from major producers, and made previously uneconomic projects feasible.
Second, sales of electric vehicles in China began to decline in late 2022 when the government warned that it would stop subsidizing the industry (and perhaps discounting what the US federal government is doing to subsidize it). .
So should we write off Albemarle as a victim of cyclical factors, or should we see it as a potential opportunity?
A look at its fundamentals, especially before the price of lithium rises, should point in the right direction.
debt
The idea of a value trap generally implies that debt could be a problem, but I don’t see a serious problem here. Its interest coverage ratio is respectable at 20.19, meaning the company has plenty of operating income to cover its interest payments. You won’t have to borrow more to keep up with your debt.
There are similar guarantees of the Piotroski F-Score and the Altman Z-Score. The first, which assesses how well a company manages its finances, sits at 6 out of 9, which is in the average range (a score of 7 out of 9 would give it a “good” or “high” rating).
The Altman Z-Score is strong at 3.83, indicating that it is not in danger of going bankrupt anytime soon.
Second, Albemarle is using its debt productively, although it hasn’t always been that way.
Currently, the weighted average cost of capital is 10.36%, while its return on invested capital is 20.52%. This makes it a value creator.
Third, we need to recognize the type of company this is, one that mostly mines or “manufactures” lithium through solar evaporation. It also operates research centers that focus on the creation and improvement of lithium-based products. All this means that the company has to make investments before sales and income. Businesses like this will usually need to have some debt.
I think the company needed debt to get started and keep operating. Furthermore, he has used this debt responsibly and productively.
profitability
To manage the cost of debt, Albemarle must be profitable on an ongoing basis. And it has been every year for the past 10 years. In addition, its margins and yields have been industry-leading.
In turn, profitability means more cash flow that can be used to continue growing the business. Once again, we see industry-leading results:
Given the severe fall in lithium prices, we should expect a decline in its profitability, right?
Apparently not. For its full-year 2023 forecast, which was revealed in the most recent earnings release, Albemarle expects net sales to increase further this year. He noted: “Full-year 2023 guidance remains unchanged from the January update and reflects strong growth with net sales rising between 55% and 75% from 2022 , driven primarily by market demand and favorable prices for lithium.”
Despite the fall in lithium prices, they are still high enough to boost sales this year and demand should also increase.
Look for dramatically higher earnings as well, as the company notes that “adjusted ebitda is expected to increase between 20% and 45%, with adjusted diluted EPS up to 50% year-over-year.”
The company expects to be cash flow positive this year, despite increasing its capital expenditures by $1.7 billion to $1.9 billion. That would be an increase from $1.26 billion in 2022.
Part of the reason for this counterintuitive outlook is that Albemarle is not entirely dependent on the electric vehicle market. It also makes highly engineered specialty chemicals, and to me the words “highly engineered” indicate pricing freedom and higher margins. In the 2022 10-K, it reported:
“The end markets we serve include energy storage, oil refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals and crop protection. We believe that our commercial and geographic diversity, technical expertise, access to resources of ‘high quality, innovative capability, a flexible and low-cost global manufacturing base, an experienced management team and a strategic focus on our core core technologies will enable us to maintain leadership positions in those areas of the specialty chemicals industry in which we operate”.
Evaluation
Now that we’ve reviewed some of the key fundamentals, it seems unlikely that Albemarle is a stock trap. It is a company that has its debt under control and is profitable, despite falling commodity and stock prices.
conclusion
Albemarle is a good company that benefited from the previous uptrend in lithium prices and is now feeling the effects of a market that responds as it usually does to negative information.
But investors who sell their shares now may suffer unnecessary losses, at least if they bought close. Albemarle is more than just a supplier of lithium for batteries; has a range of other higher-margin products that should act as buffers this year and the years to come. The bottom line is that Albemarle is more of an opportunity than a value trap.
