As early as October 2019, specialty chemicals supplier Albemarle (NYSE:ALB) was preparing investors to withstand a transition year in 2020. It expected revenue and earnings to decline compared to prior-year levels due to broader market conditions, but the business was to rebound quickly and generate positive free cash flow as soon as 2021.
Now investors need to prepare for another dose of disappointing news: The coronavirus pandemic has very likely nixed that outlook. Any hope of a relatively hasty transition to a better, more financially flexible future is probably unrealistic in light of recent events. In fact, all three of Albemarle's business segments -- lithium, catalysts, and bromine specialties -- are exposed to unique risks from the economic impacts of the global health crisis.
Here's what investors need to watch ahead of the company's first-quarter 2020 earnings report.
Brace for impact
Many companies have chosen to withdraw full-year 2020 guidance due to the uncertainty surrounding the coronavirus pandemic. It's impossible to know how long it will last or how seemingly minor disruptions in one obscure region will affect globalized supply chains. So investors can start their reorientation by expecting Albemarle to announce it has withdrawn guidance for the year.
While it's impossible to estimate the specific financial impacts of the global health crisis on the business, investors don't need to be too specific to see the potential for a significant slowdown.
Lithium (38% of full-year 2019 revenue): Challenging market conditions forced Albemarle to curtail expansion plans in 2019 and were the main drag on initial full-year 2020 revenue and earnings guidance for the business. Considering transportation markets are expected to be the single largest drive of lithium market growth, and the coronavirus pandemic has tossed automotive markets into disarray, it's natural to wonder if automakers will need to scale down or delay their electric vehicle plans -- at Albemarle's expense.
Catalysts (30% of full-year 2019 revenue): Albemarle was expecting the catalysts segment to be the only source of growth in 2020, but now it could be the largest source of weakness. The products manufactured by the business are primarily used in petrochemical refineries to make cleaner transportation fuels. Of course, with transportation fuel consumption down 30% since mid-March in the United States and global crude oil storage likely to be filled by the end of May thanks to a price war initiated by Saudi Arabia, demand for catalysts could tumble precipitously by the end of the summer.
Bromine specialties (28% of full-year 2019 revenue): Bromine chemicals typically represent a predictable stream of income for Albemarle. They serve as the backbone of flame retardants used in electronics, construction, and automotive end markets, and they are used in completion fluids for oil and gas drilling and in the synthesis of certain polymers commonly used in consumer textile products. All of those markets -- especially oil and gas drilling -- are likely to experience at least a short-term negative impact from the coronavirus pandemic.
At the time of the last update, in late March, Albemarle said its biggest problems in the business segment were from a shortage of drivers and equipment. That could compound problems on the horizon for the otherwise resilient product portfolio.
Investors should expect a downturn in 2020
Albemarle is a well-run, profitable business with a long-term track record of creating value for shareholders. The dividend stock was even added to the S&P 500 Dividend Aristocrats Index in February for having increased its dividend in each of the last 25 years. Whether the dividend is jeopardized by the coronavirus pandemic remains to be seen (the business announced a regular distribution in early May).
That said, the company's three business segments are all exposed to unique headwinds from the coronavirus pandemic. Many of those headwinds are related to consumption of commodities such as lithium and transportation fuels. It could take years for those markets, especially petroleum markets, to recover from the historic levels of oversupply building up in the system.
While the business began the year with $613 million in cash to help it navigate market uncertainty, investors should expect a disappointing year of operations for Albemarle in 2020. To get the latest information on how the business is approaching the new economic reality imposed by the coronavirus pandemic, investors should tune in to the company's first-quarter 2020 earnings conference call on May 6.