Albemarle (NYSE:ALB) is probably best known today as a lithium stock. The problem is that the lithium hype got a little overheated in 2017. In fact, the stock is now down roughly 40% from its late 2017 highs driven largely by investors' shifting opinion of the industrial metal's long-term appeal. However, for anyone who believes that electric cars are going to be a big part of the world's future, Albemarle should still be on the buy list.
Here are five key facts you need to know.
1. Lithium is important, but...
Although Albemarle's share price has been generally tracking along with the hype surrounding lithium, it isn't just a lithium miner. The company also makes catalysts that get used in areas like refining and bromine, which is a fire retardant often used in electronics. These two divisions made up 60% of sales in 2018.
That's an incredibly important fact to keep in mind. Yes, at 40% of the top line, lithium is important, but it isn't the only business. Albemarle is effectively using its catalyst and bromine operations as a foundation upon which to build its lithium business, and these two divisions are doing pretty well right now. Sales and adjusted EBITDA both advanced 11% in the catalysts division in 2018, with the bromine business seeing a 7% sales advance and an 11% adjusted EBITDA jump.
In short, don't get trapped into thinking about Albemarle as a pure-play lithium miner -- it's far from that.
2. Lithium demand is building
The big story on the lithium side of things is demand. Between 2018 and 2025, Albemarle is expecting a 21% compound annual growth rate in demand, driven predominantly by the continued push toward electric vehicles. That's what's behind the company's decision to ramp up its lithium production. Expanding lithium production is the long-term growth catalyst.
Still, you have to take the company's estimate with a grain of salt, as it wants to present the best possible story to investors. However, the increasing demand for lithium is very real -- industry watcher Adamas Intelligence recently reported that lithium use increased 76% year over year in the month of February. So, while Wall Street's feelings about lithium may wax and wane, the underlying demand story for the metal appears to be largely playing out as expected.
3. Building, building, and building some more
Albemarle has a multiyear plan to expand its production to meet the demand it expects. The goals it has set are pretty audacious.
In 2019, Albemarle is looking to increase production by 30%. It wants to follow that up with a nearly 50% increase in 2020. And then add another 40% increase in 2021. And it could keep going, estimating that it can increase production another 50% over time after 2021. If the lithium demand story resonates with you, than Albemarle is a good way to play it.
4. A balancing act
Here's the interesting thing: Albemarle's lithium business will wax and wane with the price of the metal. It is a commodity, so investor sentiment is a big component in price. However, Albemarle's production increases are so large that it can probably keep growing revenue even if lithium prices stall. Yes, you need to watch commodity prices, but that's not the only factor to consider, here. In fact, even as the stock has been falling, sales and EBITDA have been strong, with the company's expanding production supporting 21% revenue growth and 19% adjusted EBITDA growth in 2019 in the lithium division, underpinned by its material catalyst and bromine businesses.
5. Delayed, not gone
In late March, Albemarle announced that first-quarter volumes wouldn't meet its original expectations. The shortfall would lead to revenue missing targets by up to $45 million, with EBITDA missing by as much as $18 million. While not good news, $45 million is just 1% of the company's projected sales in 2019. And $18 million in EBITDA would be around 1.5% of 2019 expectations. Neither is a huge number.
Notably, management maintained its full-year targets, explaining that the shortfalls would be made up in subsequent quarters. On top of that, Albemarle had already been suggesting that the second half would be stronger than the first, so a sequentially weak first quarter was already in the cards. In other words, even if the first quarter isn't as good as investors had hoped, it doesn't really say much about the full year or the long-term story.
The big picture at this diversified lithium miner continues to look strong despite the stock being down around 40% from its late 2017 highs. If you still see the long-term growth potential here, then the company's roughly 13 times price to earnings ratio is a lot more enticing today than it was when the stock was rocketing higher on nothing more than lithium hype. Like with many things on Wall Street, now that the story is really starting to play out, those looking for short term gains appear to have moved on. For investors who still believe in the lithium demand story, though, Albemarle appears to be a good way to play the space.