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...

Lithium giant and recent spin-off Livent (NYSE:LTHM) -- one of the world's biggest producers of the metal used in electric car batteries -- got hit by a big downgrade this morning. In a note just reported on StreetInsider.com (subscription required), analysts at Argus noted the company's management warned of "weaker demand and pricing for its high-performance lithium hydroxide, due primarily to uncertainty surrounding electric vehicle subsidies in China" and predicted there will be no pricing recovery in lithium metal -- perhaps for as long as a year.

In response to these fears, Argus cut its rating on Livent stock, which is already down nearly 60% from its November highs, from buy to hold.

Talk about adding insult to injury!

Lithium salt evaporation ponds

Image source: Getty Images.

Livent reports

One week ago, Livent shocked the market with an Q1 report that paired a big earnings decline with rumblings of more disappointment to come in future results.

Last Tuesday's report from Livent featured a near-50% drop in profits on sales that were down only 4% year over year (according to data from S&P Global Market Intelligence). Earnings of $0.12 per share met analyst projections, but sales fell short, and Livent warned that demand for its key product is deteriorating, and to such an extent that profits for the rest of this year could be threatened.

Argus said management pointed to "uncertainty surrounding electric vehicle subsidies in China" for the slumping demand. Whatever's to blame, though, the outcome's the same: The analyst now projects that Livent will earn only $0.61 per share this year -- roughly half its previous projection for $1.09 per share in profit. Argus does believe the prices will recover eventually, but probably not before next year, and in reliance on this belief, keeps its $1.20 fiscal 2020 earnings target intact.

What this means for Livent

The China factor in this report has to be especially painful for Livent, which just announced the opening of its third lithium hydroxide line in China, but it's not the only problem the company faced last quarter -- a big investment that doesn't really seem to be paying off. Livent also lamented that its lithium carbonate operations in Argentina lost "almost three weeks" of production "due to the heavy rains in late January," forcing the company to acquire and process lithium carbonate from third parties (presumably at much lower profit margins) in order to meet its supply commitments to customers.

Furthermore, Livent warns that these "disruptions to operations in Argentina" in the year's first quarter will necessitate the company taking charges to earnings "mainly in the second quarter." Complicating matters further, at the same time as it was struggling to meet supply commitments in Q1, "a small number of customers" have been postponing lithium orders to later in the year -- creating a sort of hurry-up-and-wait business environment that is wreaking havoc on profitability.

The upshot of all this is that Livent "does not expect to see a meaningful change in demand for high-performance lithium hydroxide for use in high-nickel cathode chemistries until late 2019 or early 2020" (i.e., don't expect to see a lot of growth until next year) and "has reduced its full-year forecasts for volume and pricing accordingly," along with guiding toward "lower full-year revenue and earnings."

What it means for Livent investors

Based on its latest guidance for sales to range from $435 million to $475 million this year with "adjusted earnings" of $0.56 to $0.66 per share, Livent stock is selling for roughly 2.5 times current-year sales, and about 13 times this year's earnings. Unfortunately for investors, because the company did not provide GAAP earnings guidance, we don't know what how expensive (or cheap) the stock might be relative to real, GAAP earnings, however.

What we do know is that last year, Livent generated only $92 million in cash from operations, and that figure held mostly steady through Q1 2019 -- $91.5 million in cash from operations generated over the last 12 months. Problem is, Livent's guidance told us that full-year capital spending at the company is likely to surge this year, to anywhere from $235 million to $265 million -- far more cash than the company has laid out in any of the past several years, and enough of an outlay to put it deeply in the red from a free cash flow perspective.

Viewed as a continuation of the China problem we saw in Q1 -- big investments in output, hobbled by deteriorating demand -- this doesn't look like a strategy calculated to yield real profits for Livent or its shareholders for some time to come. If you ask me, Argus' decision to downgrade Livent today is the right one.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.