2016 was a year of big headlines for the global battery industry, featuring both good ones (like the grand opening of Tesla's (NASDAQ:TSLA) first Gigafactory in Nevada) and bad ones (like Samsung's famous exploding smartphones). By contrast, 2017 has been relatively tame. The fact is, I'd argue that the biggest battery headline this year so far was the announcement that a researcher at Tufts has invented a solid polymer lithium metal battery that can't catch on fire, and that will be for sale... eventually.
But battery news won't stay quiescent forever. 2018 could see investor interest in electric-car batteries revive as Tesla works out the kinks in Model 3 production and mass-market electric cars begin appearing on American roads in greater numbers. With that prediction in mind, let's take a look at three battery companies positioned to profit: Tesla, Panasonic (NASDAQOTH:PCRFY), and Albemarle (NYSE:ALB).
Elon Musk's Tesla is the most obvious beneficiary of investor interest in batteries. The electric-vehicle maker led my list of top battery stocks to buy in 2017 (and its stock rose 48% over the course of the year). Tesla tops the list again in 2018 -- and for much the same reason: scale.
The battery pack for Tesla's top-of-the-line Model S P100D comprises 16 lithium ion battery modules, containing 516 battery cells each. That's a total of 8,256 battery cells. Times the 500,000 electric cars Tesla plans to be selling annually by 2020, that's 4.1 billion cells -- and based on what we know about the new "2170" Gigafactory batteries that will be going into the Model 3 (and presumably, subsequent Tesla models), these batteries are only getting bigger, more powerful, and more capable.
True, China is racing to challenge Musk with giga-battery factories of its own. But they'll have to move fast if they want to catch Tesla. In 2018, Tesla expects to be churning out as much as 35 GWh worth of batteries from its first Gigafactory. These batteries will become Tesla's de facto standard for powering not only its electric cars, but its Powerwall 2 home battery systems and its Powerpack 2 energy storage systems for utilities as well.
With the demand for and usefulness of its batteries growing, it's no wonder Tesla plans to triple the current capacity of its first Gigafactory, has opened a second Gigafactory for solar cells and modules, and is planning to build as many as three more Gigafactories in the years to come.
Our second battery stock to watch is also a returning champion: Tesla's partner in the Gigafactory Project, Panasonic (whose shares gained 44% in 2017, by the way). The Japanese electronics giant will be occupying half the manufacturing space at Tesla's huge new Nevada battery factory, and collecting payment for at least $1.7 billion worth of battery cells that it will produce for, and sell to Tesla there. Thus, the more batteries Tesla sells, the better for Panasonic.
According to the latest data from market share watcher Statista.com, Panasonic is the market leader in lithium ion battery production, and likely to retain this title into at least 2018, when it will be twice as big as No. 2 contender and Warren Buffett favorite, Chinese electric car company BYD. (Buffett's Berkshire Hathaway owns a 16.5% stake in BYD and is the company's second-largest shareholder, according to data from S&P Global Market Intelligence).
Batteries for electric cars are part of Panasonic's biggest and most profitable business, automotive and industrial systems, which contributed $980 million in profits to Panasonic on sales of $23 billion last fiscal year. The more success Tesla enjoys selling its Model S cars, Model 3s, and its shiny new fleet of electric tractor-trailers, the better the news will be for Panasonic.
Last year, I named General Motors my third favorite "battery stock" -- but as it turns out, that was a bad call. General Motors stock gained "only" 18% last year. This year, I'm switching horses and picking Albemarle instead.
At $14 billion in market capitalization, Albemarle stock has more room to grow than $57 billion General Motors. What's more, with a share price that's only 16.5 times trailing earnings, Albemarle stock is cheaper in valuation than General Motors (which costs 20 times earnings today).
What makes Albemarle a good battery bet? As a leader in specialty chemicals, Albemarle is heavily leveraged to the growing popularity of lithium-ion batteries. More than 36% of the company's $2.7 billion in revenue last year came from the sale of lithium and advanced materials, which include such compounds as lithium carbonate and lithium hydroxide, both used in battery manufacturing. And these are profitable products for Albemarle, earning a net profit margin of 27% -- after tax.
According to Mining Global, Albemarle is now the world's top producer of lithium. What's more, in January, it secured a deal with Chile's Development Agency allowing it to grow its lithium mining operations in that country, with the result that Albemarle's production of "battery-grade lithium carbonate" is expected to more than triple to 80,000 tons per year.
Analysts who follow Albemarle are telling investors the company will only grow its earnings about 11.4% annually over the next five years. With supply from its mining operations expanding, though, and demand from companies like Panasonic and Tesla growing, I think that estimate might prove conservative.