Electric vehicle (EV) stocks have been all the rage for a few years now, and for good reason. Various estimates point to new vehicle sales consisting of nearly 50% EVs by 2030 -- up from a roughly 14% estimate of all new vehicle sales being an EV in 2022. If all those new EVs are indeed manufactured in the next eight years, the global supply of lithium will need to balloon.
That's where top lithium producer Albemarle (ALB 0.31%) comes in. What started as my small investment in an attempt to hedge against some inflation risk in 2022 has turned into one of my larger holdings here at the start of 2023. Albemarle just released its growth targets for the next five years, and if management's goals are attainable, this could be one cheap stock right now.
A 2022 of epic proportions, but just wait...
Lithium has become a hidden but commonplace material in our daily lives. It's already the base element that stores energy in lithium-ion batteries in our smartphones, tablets, and laptops. But a battery for an EV, and especially energy grid batteries (which store energy from solar, wind, and excess power from fossil fuel facilities for later use), are exponentially larger. Many of these batteries, like the ones for EVs, will also require new technology and higher-grade lithium to make an electric vehicle a viable alternative to traditional internal combustion engines.
The problem, though, is that developing a mining project and getting it up and running can take many years. It's now become obvious the world has an insatiable need for lithium, and a flood of upstart mining companies are trying to race their way to production. But Albemarle saw the coming wave early and already has numerous sites currently in, ramping up, or nearing production.
The coming competition has had some analysts, myself included at times, worried that Albemarle could suffer in the coming years if the lithium supply expands and brings down sky-high prices. But Albemarle just assuaged some fears and provided five-year growth guidance based on its current customers' demand (Albemarle strikes long-term supply contracts with these customers), the cadence of future EV and energy grid projects, and an influx of supply from lithium mining peers. Suffice it to say the guidance was quite good.
The company's estimate is its 2022 revenue (64% lithium, 24% specialty materials like bromine, and 10% from catalysts used in petrol and chemicals refining) will be $7.3 billion. That's more than double the $3.3 billion in sales in 2021. Operating cash flow should be about $1.9 billion in 2022, up from $344 million in 2021.
By 2027, Albemarle now thinks revenue will be in the range of $17.6 billion to $19.3 billion, more than double its preliminary full-year 2022 sales estimate. Its operating cash flow guidance by 2027 is $6.6 billion to $7.1 billion. That's even better news, as it implies operating cash flow margins will expand from about 26% in 2022 to about 38% in five years. Market-beating stocks don't just grow; they also rapidly expand profitability.
Based on this guidance, Albemarle stock currently trades for about 4.5 times the expected 2027 operating cash flow. Shares could be an incredible value right now.
Pure supply is one thing; quality supply is another
An important point here: operating cash flow doesn't pay all the bills. In calculating ultimate free cash flow, capital expenditures (on things like property and equipment) need to be subtracted. Lithium mining, like any base material extraction and refining business, is expensive. It's why, though it has been reporting generally accepted accounting principles (GAAP) net income this past year, Albemarle is just now hitting positive free cash flow as of late.
Nevertheless, Albemarle is currently doing a lot of heavy lifting. It's developing more mining sites and lithium processing facilities in key markets around the world like Western Australia (where the bulk of global lithium supply currently comes from), Chile, China, and the U.S. But another key differentiating factor I like about Albemarle is its investment in lithium research and development. Supplying raw lithium is one thing, but providing high-quality lithium that's ready to use in advanced applications (like an EV, for example) is another thing entirely. A nearly $200 million facility located in North Carolina called Albemarle Technology Park is currently in development.
For all these reasons, I like the risk-to-reward balance on Albemarle stock far more than on other upstart lithium stocks. And together with a portfolio of semiconductor stocks, Albemarle is my bet on EVs rather than EV manufacturers themselves -- many (but not all) of which have been plagued with production problems and missed delivery deadlines.
Albemarle also has a lot to prove in the coming years as it tries to hit these big milestones it has set for itself. But the company is already profitable, has a healthy balance sheet, and is in a pole position to benefit from the rise of the EV and energy storage market. I'll be looking to add to my current position within the next few months.
