The production of electric cars is increasing, as every major automaker has begun to ramp up production of these environmentally friendly vehicles. The increasing use of electricity looks like the future in this vital oil end market. This shift is a huge opportunity for lithium producer Albemarle Corporation (ALB 8.29%). But does the surge in the electric vehicle market spell the end for oil companies like ConocoPhillips (COP 4.55%)? And is that enough information to help investors pick between these two stocks? Read this before you decide which of this pair is the better stock to buy.
It's electric
Albemarle is one of the world's largest producers of lithium, an industrial metal used in rechargeable batteries. The company projects demand for lithium to increase 21% a year between 2018 and 2025. The main driver of that demand will be the transportation sector, where demand from cars is projected to increase 36% annually. That's not the only source of growth, however, with demand from other vehicles (like buses and trucks) expected to advance 22% a year. Together, these two uses are expected to make up roughly 70% of lithium demand in 2025, up from just 35% in 2018.
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Even if the company's estimates fall short of the mark a little, this is a big shift. Albemarle is positioning itself to take advantage of this massive demand growth. It is looking to expand lithium production 30% in 2019. It intends to follow that up with a nearly 50% hike in production in 2020 and another 30% in 2021.
That said, Albemarle has two other divisions (bromine and catalysts) that account for around half of the company's EBITDA. It is lithium that gets the big headlines, making it the most important player here. However, the other divisions are the foundation on which Albemarle is shifting toward the future.
Lithium is a commodity subject to swings in investor sentiment, so the stock can be volatile. However, even with relatively weak lithium prices in 2018, Albemarle's lithium production increases, notably coupled with strength in its other two segments, were more than enough to keep the company's business growing last year. Adjusted earnings advanced roughly 19% year over year in 2018. The diversified company is projecting an 11% to 19% increase in 2019 as well. If you can stomach the stock price swings related to investor sentiment, the underlying story behind Albemarle is quite strong.
Check out the latest earnings call transcripts for Albemarle Corporation and ConocoPhillips.
Focused on the past
ConocoPhillips is a different tale altogether. In 2012, the company completed the spin-off of its refining assets, making itself a pure play on oil and natural gas drilling. This is a bet that oil still has a bright future -- which, despite the increasing use of electricity in a key end market, isn't actually an off-base view. Although oil is a depleting asset (every barrel pulled from the ground is one less barrel in the ground), the world simply can't stop drilling. And energy demand in emerging markets is likely to keep oil demand growing, even if just modestly, for decades to come.
ALB Dividend Per Share (Annual) data by YCharts.
The problem, like with Albemarle, is commodity prices. The ups and downs of oil prices have a very direct impact on how much money ConocoPhillips makes in a given year. For example, the deep oil price decline that started in mid-2014 pushed ConocoPhillips' revenues down 44% year over year in 2015, and it bled red ink for three consecutive years (2015 to 2017). With nothing to offset the impact of oil price volatility, investors were fully exposed to the downturn. This, by the way, also resulted in a dividend cut in 2016.
More than the obvious
When you look at these two companies, you must first decide how you feel about the future for lithium and oil. One is seeing robust growth, while the other is likely to see growth slow to a crawl. However, there's another dynamic here that you have to consider. Although Albemarle's future will be increasingly focused on lithium, it is building that future on a diversified business. That can help to offset the ups and downs in lithium prices and keep underlying performance strong. ConocoPhillips, having spun off its downstream (refining) operations, is focused only on oil and gas production. It is exposed entirely to commodity swings.
Even if you believe oil has a strong future, a more diversified option would probably be a better bet. If you are looking at this pair, Albemarle's diversified approach to growth wins -- assuming you buy into the lithium story.
