Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Livent shares tumbled more than 7% on Tuesday, presumably in response to an announcement by its parent company, FMC, which said it will distribute the remaining 84% of Livent shares that it still holds to its shareholders on Friday, March 1.
Flooding the market with freely tradable shares will quickly dry up any lack of supply of Livent stock on the market, permitting the shares to reach their natural price and depriving them of any sort of "scarcity" premium. That fact may explain why investors fled the stock yesterday...but why are these same investors now rushing to buy back Livent -- up 2.5% as of 10:20 a.m. EST?
Read on to find out.
Lithium sentiment struggles to stay positive
Investors in the lithium market will be familiar with the story so far: One day, analysts love lithium stocks; the next day, they hate 'em. Most days, the reasons analyst upgrade or downgrade lithium stocks can be traced back to how they see lithium demand matching up with supply over the coming years and decades.
As you may recall, for example, around this time last year, market researchers at Vertical Research Partners laid out a case for the top three global producers of lithium growing their production from 140 thousand tons of lithium per annum (KTPA) in 2017 to 330 KTPA by 2021, an increase in supply of 136%. Against this backdrop, though, Vertical warned that demand for lithium coming from producers of lithium-battery-powered devices -- everything from cellphones to PCs to electric cars -- would grow only 71% through 2021.
Or put more simply, supply would outgrow demand by nearly a factor of two, causing lithium prices to plummet.
Why Gabelli likes Livent
That's not necessarily how the analysts at Gabelli &Co. see things shaping up, however. Initiating coverage of Livent with a buy rating this morning, Gabelli focuses more on the demand side of things than on supply, arguing (in a note covered by TheFly.com) that lithium demand is going to rise substantially -- and keep on rising for the foreseeable future.
If the analyst is right about this, of course, then even if Vertical is right about a temporary oversupply of lithium forming two years from now, this problem should self-correct as demand eventually catches up with supply. Meanwhile, as one of the biggest players in the market, Livent will hold "a formidable position on the lithium cost curve," says Gabelli, which should enable it to survive any temporary declines in pricing.
Is Livent a good bet for long-term investors?
In other words, Gabelli seems to be taking a long-term view of the lithium market -- a strategy I agree with. But is Livent stock at today's prices a good bet for the long term?
Three months ago, with Livent shares selling for $17 apiece, I argued that the stock did not look like a great long-term investment. Today, however, with Livent stock 24% cheaper and hovering close to the $13 mark, I'm more inclined to take a favorable view of it.
Consider: Currently valued at $1.9 billion in market capitalization, with minimal debt, Livent sells for about 15 times trailing earnings. Now, based on the company's latest guidance, analysts are looking for Livent's earnings to decline this year to just $0.95 per share. But here's the thing:
That's only $0.04 less per share than Livent earned last year -- not enough to affect the value proposition of the P/E much. What's more, according to analyst estimates collated by S&P Global Market Intelligence, Wall Street by and large is looking for Livent to nearly double its earnings as production expands over the next four years, growing 85% total (or 17% per year) through 2023.
To me, 15 times earnings doesn't seem an unreasonable price to pay for 17% annualized earnings growth. In fact, I'd even go so far as to call the stock a modest bargain. Accordingly, I agree with Gabelli's assessment: Working off a $13 share price today, Livent stock really does look like a buy.