Where Will Albemarle Be in 1 Year?

When you're considering investing in a stock, it's always a good idea to sit down and attempt to map out what the company's situation could look like in a year's time. Or rather, what the outlook for the company could look like in a year's time. The goal is to visualize what other investors, i.e. the market, will be seeing in that business down the road.

In this case of specialty chemicals company (and eternal electric vehicle play) Albemarle (ALB 1.90%) this exercise probably would result in a positive viewpoint. However, the deeper question for investors is whether you would want to be holding the stock longer term? Here's what you need to know about this company before buying in.

How Albemarle makes money

Let's start with a quick look at Albemarle's 2020 sales and earnings numbers, as well as a brief summary of the key uses of the chemicals it produces, and management's medium-term outlook as based on its 2019 investor day presentation.

Supplying lithium for use in electric vehicle batteries is the key to Albemarle's future. Image source: Getty Images.

Based on analysts' forecasts, at the end of 2021, the company will have grown sales by 2.3%, and total adjusted EBITDA will have risen by a miserly 1.6% to $832 million from $819 million in 2019.

Those numbers are nothing to write home about. However, there's another side to the story, and another key question: What will Albemarle's growth outlook be at the end of 2021?

Data source: Albemarle presentations.

It's all about electric vehicles

As you can see from the table above, lithium, and specifically lithium for use in electric vehicle batteries, is the company's key growth driver. And on that front, there is cause for optimism.

Although sales volumes are only expected to rise slightly and prices are expected to decline, it's likely that the growing demand for lithium will deplete suppliers' inventory, leading to a more favorable demand/supply balance for providers. Of course, the main reason why the current demand/supply balance is unfavorable comes down to the fact that the COVID-19 pandemic curtailed production of new vehicles in 2020.

For example, based on industry forecasts, Albemarle was expecting 10 million EVs would be produced in 2020 and 2021 (with a split of 4.1 million and 5.9 million). Instead, only 3.2 million EVs were produced in 2020. But it is still expected that 5.9 million will be manufactured in 2021. Clearly, demand will need to catch up with supply.

Albemarle tends to sell lithium on long-term negotiated contracts, so the key to its business is developing/expanding mines and securing long-term contracts rather than selling into the spot market. Moreover, it takes time for production to react to meet demand.

However, the spot market guides the price that Albemarle can get for contracts, and mining expansion decisions are obviously led by demand expectations. 

Long-term demand for lithium

With this in mind, the long-term outlook for EV production and lithium demand is excellent, and at the end of 2021, investors could be looking at Albemarle as a company with good sales momentum on the cusp of a multiyear expansion in sales thanks to a growing electric vehicle market.

Moreover, even though the pandemic curtailed EV production it appears to have accelerated investment in EVs, particularly relative to internal combustion engine investment. Investors can see this in the public pronouncements of some of the companies that supply automakers.

There's no shortage of lithium on the planet. Image source: Getty Images.

For example, Cognex (CGNX 2.26%) sells machine-vision technology to automakers. Those companies start to bring that technology into the electric vehicle design and production process around 18 months ahead of a vehicle's launch, according to Cognex's management. Discussing the battery manufacturing environment on the recent earnings call, Cognex CEO Rob Willett said "we're definitely seeing very strong and improving demand in that market." 

As this year progresses, it's possible that excitement around EV investment will build. Albemarle should see it reflected in its sales and its sales-growth projections.

Is Albemarle a buy?

That said, a note of caution is necessary here. Lithium is a commodity, and there's no shortage of lithium resources on Earth. Indeed, Tesla (TSLA -0.36%) CEO Elon Musk has outlined plans for his company to to reduce its lithium cost by 33% and even discussed plans to use its own lithium mined with a novel and potentially lower-cost technique. Whether Tesla will go ahead with these plans in a major way is yet to be seen, but Musk's intent should serve as a reminder that speculators will seek to find ways to extract the lithium required by the latest technological innovations. 

In other words, investors shouldn't assume that soaring demand will necessarily translate into higher prices for lithium. In summary, while it's likely that Albemarle will look like a much better investment a year from now, that might not necessarily be the case five years from now.