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If you're interested in lithium stocks, this comparison should help you make investment decisions.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
We're going to compare how the lithium businesses of the three big producers that trade on a major U.S. stock exchange -- Albemarle (ALB 0.03%), Sociedad Quimica y Minera de Chile (SQM 0.03%), or SQM, and FMC Corp. (FMC 0.01%). -- performed in the second quarter.
First, keep in mind these caveats: None of these companies are lithium pure plays, so their results will depend on how all their businesses perform, and qualitative factors are often just as important as quantitative ones. Nevertheless, this face-off should help you make investment decisions in the lithium space.
As background, lithium stocks were hot in 2016 and 2017 due to soaring demand for the metal to make batteries for electric vehicles, though they're struggling this year. Some market participants are concerned about an oversupply arising from additional production capacity coming on line, resulting in lithium prices facing pressure.
A lithium brine pool. Image source: Getty Images.
|
Company |
Q2 2018 Result |
|---|---|
|
Albemarle |
30.2% year-over-year increase to $317.6 million |
|
SQM | 21.8% increase to $183.9 million |
|
FMC Corp. |
45.8% increase to $107.9 million |
Winner: FMC and Albemarle.
There's a good argument to be made that both FMC and Albemarle deserve to win this category. As it did in the first quarter, Philadelphia-based FMC grew its lithium business revenue the fastest year over year. That said, its lithium business is, by far, the smallest of the three, which means it's easier to grow it on a percentage basis. Albemarle, which is based in North Carolina, gets the nod here because its lithium revenue growth was notable given the size of its lithium business, which is the largest in the world.
Chile's SQM is once again the laggard in this category, though its year-over-year lithium sales growth did pick up from the previous quarter, when it was only 12%.
All three companies are expanding production capacity.
|
Company |
Q2 2018 Result |
|---|---|
| Albemarle |
22.9% year-over-year increase to $141.6 million adjusted EDITDA |
| SQM |
11.2% increase to $119.0 million gross profit* |
| FMC Corp. | 84.8% increase to $51.2 million EBITDA |
Data sources: Q2 2018 earnings reports. *SQM's Q2 result had to be calculated by subtracting Q1 lithium earnings from first-half earnings; the year-over-year change was then determined after calculating the Q2 2017 result in the same manner.
Winner: FMC and Albemarle.
The two U.S.-based companies each get this category in their respective win column for the same reasoning as discussed above.
Another caveat: The companies aren't using the same metric to measure the profitability performances of their business segments. So investors should place greater weight on each company's percentage growth from the year-ago period, rather than the comparison among their absolute earnings numbers.
|
Company |
Q2 2018 Result |
|---|---|
| Albemarle |
44.6% |
| SQM |
64.7% |
| FMC Corp. | 47.5% |
Data sources: Q2 2018 earnings reports.
Winner: SQM, with a caveat.
SQM has long been considered the lowest-cost producer of lithium, so it makes sense that its profit margin is the highest. Profit margin -- calculated by dividing some measure of earnings by revenue -- reflects the efficiency of a company's operations and the mix of the products it sells. However, the same caveat as above also applies here: The companies are not using the same metric to measure the profitability of their segments.
|
Company |
Lithium Business Percentage of Total Revenue in Q2 2018 |
Lithium Business Percentage of Total Earnings in Q2 2018 |
|---|---|---|
| Albemarle | 37.2% |
54.8% of adjusted EDITDA |
| SQM | 49.7% |
53% of consolidated gross profit |
| FMC Corp. | 8.5% | 13.8% of EBITDA |
Winner: Albemarle and SQM.
Lithium comprises a big portion of both Albemarle's and SQM's total revenue and earnings, with the two companies nearly tied on the earnings percentage front. So, currently, investors in search of a lithium stock that's as close to a pure play as possible should stick with one of these two.
However, there's a big change on the horizon. FMC is separating its lithium business from its core agricultural chemicals business, so the new company -- which will be called Livent -- will be a pure play on lithium. In October, FMC plans to offer 15% of its lithium business to the public via an initial public offering (IPO) on the New York Stock Exchange, while the remaining shares will be spun off to FMC Corp. shareholders within six months of the IPO.
Albemarle scores 3 points and SQM and FMC tie with 2 each. But keep in mind the caveats discussed.
Indeed, Albemarle remains the best current play on lithium for most investors, in my opinion. Like SQM, it has considerable exposure to lithium, but it doesn't have SQM's higher risk level stemming from being headquartered in a developing country.
FMC is a solid company, but it currently has relatively little exposure to lithium. As discussed, however, investors will soon have two ways to become shareholders of FMC's pure-play lithium business.