It was just a few years ago that Wall Street was enamored with any company tied to industrial metal lithium, which gets used in batteries. Then, somewhat predictably, high lithium prices led to oversupply and investors soured on anything related to lithium. The stock of Albemarle (NYSE:ALB), one of the largest lithium producers in the world, rode that emotional roller coaster up and right back down. More recently, after issuing a warning ahead of third-quarter earnings, the stock fell a painful 10% in a day. Is it time to get out, or is there still a reason to buy Albemarle stock?

The warning

The problems Albemarle faced in the third quarter were varied. For example, sales volume was lower because of disruptions caused by Typhoon Tapah, reducing EBITDA by around $15 million. That's out of the company's control, and management expects to make at least part of that up in the fourth quarter. In addition, the company had to deal with some operational issues in Chile that trimmed EBITDA by around $10 million. Making lithium is complex, so this isn't an issue to get too worried about, and management is working to improve reliability. Moreover, the company's longer-term track record earns it the benefit of the doubt here.

An electric automobile being charged

Image source: Getty Images

A little more concerning was the "out-of-period adjustment regarding Lithium carbonate inventory values." That resulted in a $7 million non-cash charge, and amounts to an accounting error. This is a self-inflicted wound that needs to be monitored. If there are too many accounting issues, investors should start worrying about how good a handle the company has on its finances. But it's too early to call this a trend at this point.

The last issue impacting the fourth quarter is the biggest: weak lithium pricing. The impact was a $5 million headwind to EBITDA in the quarter. This isn't new; lithium prices have been weak for a while now. So far Albemarle has weathered this issue fairly well, because it generally favors long-term contracts and has been increasing production. But contracts eventually roll over, which means lower prices start to filter in. Worse, if a long-term contract is signed again, Albemarle is effectively locking in those lower prices. Compounding this issue is the fact that there's no new capacity coming online in 2020, so the company will feel the full brunt of the pricing issue with no offset from higher sales volumes. The call right now is for EBITDA to be lower in 2020 than in 2019. This is one investors need to think carefully about, as it materially weakens Albermarle's near-term prospects.

Not the end of the world

Here's the thing: Although the stock fell 10% in a day on this news, Albemarle was still projecting earnings to increase by 10% to 14% in 2019. And it continues to build out its production -- it just won't have anything major coming online in 2020. Production won't really start to increase until late 2021, so 2020 is really just a lull in production (and likely earnings). And while there are no big plans after 2021, the company has additional projects that it could put in place if demand is material enough.

ALB Chart

ALB data by YCharts

As for pricing, there's a glut of lithium today. But if Albemarle's demand projections are anywhere near accurate, that won't last for too long. Between 2018 and 2025 the company expects lithium demand to increase at an annualized rate of 25%. That's not 25% between 2018 and 2025, that's 25% each year, on average. That's huge, driven by electric vehicles, and should go a long way to sop up any excess supply that exists today.

So if things play out reasonably well, Albemarle's production will come online and satisfy this increasing demand. If things play out really well, demand will outstrip supply along the way, and Albemarle will benefit from higher prices on top of increasing production. But investors will have to get through 2020 to see any of this.

Which brings up the next issue: Albemarle isn't just a lithium stock. It has a diversified business, with around 60% of revenue and roughly half of its EBITDA coming from its bromine and catalyst businesses. Although it isn't investing in these operations the way it is in lithium, they provide the financial foundation on which it is building out the lithium operation. This isn't a one-trick pony that's praying it can survive. Albemarle should have no problem muddling through this weak spell in the market.

Not for the faint of heart, but...

The lithium story isn't great today, and conservative investors would probably be better off avoiding Albemarle. However, the long-term growth story for lithium hasn't changed. And while Albemarle is warning that 2020 will be a tough year, it is still working to take advantage of the growth it expects for this vital battery material over the longer term. If you can stomach a little uncertainty, Albemarle is worth a deep dive. 

Note, too, that its 2.3% dividend yield is near the highest levels in its history, and the trailing payout ratio is only about 30%. Add in 25 years of annual dividend increases, and dividend investors focused more on capital growth than a high level of income might want to jump aboard while the stock is in the doldrums.

That said, there's probably no rush, since Albemarle is clearly in the Wall Street dog house. Interested investors can probably wait for the full third-quarter 2019 earnings release on Nov 7 just to get some additional detail on what actually happened in the quarter and what management is expecting in 2020. As long as the big-picture story doesn't change, then Albemarle looks like a buy at recent prices.