What happened

Shares of Livent (NYSE:LTHM) fell as much as 17.4% today after the lithium producer reported fourth-quarter and full-year 2019 operating results. The company missed expectations for Q4 revenue and finally joined peers Albemarle and Sociedad Quimica y Minera (SQM) in slowing capacity expansion, which the smaller peer had previously resisted

The revenue miss wasn't significant. Livent reported fourth-quarter revenue of $78 million, whereas Wall Street was expecting $82 million on average. But investors are more concerned with guidance for the year ahead. 

As of 1:19 p.m. EST, the small-cap stock was sitting on a 15.5% loss.

Multiple declining arrows drawn on a chalkboard.

Image source: Getty Images.

So what

Unlike its larger peers, Livent is entirely dependent on lithium. The company's smaller production footprint combined with tumbling average selling prices in major markets to create significant headwinds in 2019. The business didn't have sufficient supply to meet customer demand, which forced it to purchase lithium on the spot market. That drove up costs in an already weak margin environment.

The business was still comfortably profitable, but the year-over-year comparisons aren't favorable.

Metric

2019

2018

Change

Revenue

$388.4 million

$442.5 million

(12%)

Gross profit

$114.9 million

$206.3 million

(44%)

Operating income

$50.2 million

$126.6 million

(60%)

Data source: Press release.

The headwinds are expected to persist for at least another year. Livent issued full-year 2020 guidance for revenue of $375 million to $425 million. Production volumes are expected to grow 30% from 2019 levels, but weak average selling prices will offset most of the near-term benefit.

Livent also delayed the completion of an important project in Argentina by six months, now expecting it to be completed in mid-2021. A separate conversion project that depended on it will also be delayed.

Now what

Investors that followed along with recent statements from industry peers shouldn't be too surprised by Livent's full-year 2020 guidance or delayed production expansion. Albemarle and SQM both delayed important projects or scrapped them indefinitely in an attempt to help balance international markets and lift selling prices. Albemarle has guided for a comparatively weak 2020, too. 

That said, the long-term potential for major lithium producers remains intact. Albemarle expects lithium demand to triple from 2019 to 2025, driven by an expected 599% increase in automotive applications. Livent is well positioned to take advantage, but investors have to remain patient and weather above-average volatility to reap the potential rewards.