What happened
Shares of Albemarle (ALB -0.25%) fell as much as 10% today after the company announced preliminary third-quarter 2019 operating results. The lithium leader is still working out kinks in production processes in South America, dealing with economic weakness in China, and navigating weather-related events -- this time Typhoon Tapah.
As a result, the business reduced full-year 2019 revenue and adjusted EBITDA guidance. Management also told investors that adjusted EBITDA will likely decrease in 2020 compared to this year due to the descending trend in average selling prices and the fact that Albemarle won't enjoy any benefits from production growth.
As of 10:37 a.m. EDT, the former growth stock had settled to a 6.3% loss.
Image source: Getty Images.
So what
Albemarle didn't have a bad quarter, and the business is far from struggling, but the results looked poor relative to expectations. The lithium segment is expected to have grown revenue and adjusted EBITDA 22% and 12%, respectively, from the third quarter of 2018. But those numbers are preliminary and could change once finalized in the coming weeks.
That said, the sluggish earnings growth isn't as bad as it seems. Impacts from Typhoon Tapah in China, production issues in Chile, and pricing pressure in the Chinese market combined to reduce EBITDA by approximately $30 million during the quarter. Albemarle expects to recoup half of that -- delayed by the cyclone in Asia -- in the fourth quarter.
While those factors were largely out of the company's control, Albemarle was still forced to reduce full-year 2019 guidance. Management now expects revenue of about $3.65 billion, compared to a previous expectation of $3.75 billion. The new guidance reflects year-over-year growth of about 8.5%. Management now expects adjusted earnings per share (EPS) of about $6.10, down significantly from a previous expectation of roughly $6.45. The new EPS guidance represents year-over-year growth of about 12%.
Now what
Management wisely set investor expectations for the remainder of 2019 and into 2020 sooner rather than later, but Wall Street is worried that the lithium market hasn't quite reached its bottom. Analysts are probably right. That said, Albemarle isn't a struggling business by any means. It's important for investors to remember that the decision to slash near-term lithium production growth plans, announced this summer, means the company will be free cash flow positive in 2021. That will provide new financial flexibility to selectively target growth in the 2020s; investors just have to make it through 2020 first.
