Thanks to a variety of factors such as climate change and government support, electric vehicle adoption is expected to increase, and that means many investors are predicting high-double-digit annual growth in related stocks going forward. In particular, global lithium demand is expected to explode for years to come due to current underspully.
Due to these powerful tailwinds, chemicals manufacturer Albemarle Corporation (ALB, Financial) is going all-in on lithium and plans to expand its annual lithium production from 200,000 metric tons in 2022 to 500,000-600,000 metric tons by 2030. In the last couple of years, as prices of lithium soared 400%, Albemarle has racked up sales and profits. In November, the stock reached an all-time high of $325 per share. Today, shares are off 37% from that high and the stock is trading at a forward price-earnings ratio around 7 based on analysts' estimates from Morningstar (MORN), offering value investors an incredible opportunity in my view.
Business breakdown
Albemarle is a leading global developer, manufacturer and marketer of engineered specialty chemicals. These days, it's mainly producing lithium and bromine-based solutions used in batteries, flame retardants, catalysts and consumer electronics. The company operates through three main divisions: Lithium, Bromine and Catalysts.
The Lithium division produces a range of lithium compounds used in lithium batteries for consumer electronics and electric vehicles, such as high-performance greases, thermoplastic elastomers, catalysts, etc. It also makes products for organic synthesis processes, life sciences and the pharmaceutical industry and supplies cesium products and other materials for pyrotechnical applications, along with services related to reactive lithium product handling and lithium by-product recycling.
The Bromine division offers bromine and bromine-based products for fire safety solutions, specialty chemicals for applications in chemical synthesis, oil and gas drilling, mercury control, water purification and food processing. It also provides other specialty chemicals, such as tertiary amines, for use in surfactants, biocides, disinfectants and sanitizers.
The Catalysts division focuses on hydro-processing, isomerization and alkylation catalysts, fluidized catalytic cracking catalysts and additives, as well as organometallics and curatives.
The main business is lithium
As the lithium market has taken off, Albemarle has become one of the largest and most diversified producers of lithium and lithium compounds globally. With a strong presence in the lithium market, the company plays a critical role in supplying lithium to various industries, especially the fast-growing electric vehicle and energy storage sectors. In fact, Bloomberg estimates more than half of all passenger calls sold in the U.S. will be electric by 2030.
The company has lithium mines in several locations around the world. Some of their key operations include the following:
Greenbushes Mine, Western Australia:
Albemarle owns a 49% stake in Talison Lithium Pty Ltd, which operates the Greenbushes Mine in Western Australia. This mine is considered one of the world's largest and highest-grade hard rock lithium deposits (spodumene). The lithium extracted from Greenbushes is converted into lithium chemicals at processing facilities in Australia and China.
Salar de Atacama, Chile:
Albemarle has lithium extraction operations in the Salar de Atacama in Chile, one of the world's largest and highest-quality lithium brine deposits. The company uses an evaporation process to concentrate lithium from the brine and produces lithium carbonate and lithium chloride at its facilities in the Atacama region.
Silver Peak Mine, Nevada, USA:
Albemarle operates the Silver Peak Mine in Nevada, the only lithium-producing mine in the United States as of this writing. The mine extracts lithium from brine beneath Clayton Valley's dry lakebed through a process of evaporation and concentration.
Financially solid
In the last decade, Albemarle has grown revenues from $2.3 billion to more than $7.3 billion, gross profit from $850 billion to nearly $3.1 billion and retained earnings from $1.5 billion to $5.6 billion. This has increased book value from $20.33 to $68.13 per share. In that time, Albemarle’s market capitalization has risen to $23.66 billion from $5.5 billion, meaning every dollar in retained earnings has produced $4.43 in market value for the company.
Aside from being in the right business, the company looks like it's well run. Gross margins and return on equity are both above 40% and return on assets approach 17% a year. It earns more than $360,000 per employee, and has kept long-term debt to a manageable $3.1 billion while maintaining nearly $1.5 billion in cash.
A brilliant future
The markets Albemarle serves have strong and growing demand. For instance, the entire value chain of lithium ion batteries is expected to be five times the current size, or roughly $400 billion, by 2030, accordint to estimates from McKinsey & Co. Only $23 billion of that is lithium itself, but the stickiness is obvious. Similarly, there is a consistent demand for bromine-based products in various industries, such as flame retardants, water treatment and pharmaceuticals.
The company's vertical integration strategy allows it to manage its supply chain more efficiently, ensuring a stable supply of raw materials and reducing the impact of external factors on its operations. This strategy also enables Albemarle to maintain better control over product quality and costs. Albemarle continues to invest capital into new plants in both North and South Carolina, and has a broad global footprint, with operations and sales in various countries across Europe, Asia-Pacific and Latin America as well. This extensive presence helps the company serve customers more effectively and capitalize on opportunities in different markets.
Shares are on sale
Albemarle has seen one third of its market value wiped off in the last couple of months, pushing the market cap below $24 billion. This is what value investors wait for, a fundamentally solid company trading at a bargain price. A big reason for the price decline is the fall in lithium prices, which seem to be as volatile as bitcoin. However, despite the volatility, lithium demand is still growing, so despite the short term choppiness, I believe in the long-term prospects.
Albemarle is priced at a price-earnings ratio of 9 and a forward price-earnings ratio of 7, both of which are below the sector medians and its own five-year averages. If the valuation were to rise to 15 times earnings, the stock price could double next year if the company hits its earnings projections.
