As investors, we are constantly told to have a forward-looking perspective because past performance isn't a guarantee of future performance. That's the exact mentality that has led me to the next investment that I will be making for my Real Money portfolio. You see, Albemarle Corporation (ALB 0.31%) is a diversified chemical manufacturer that will position my portfolio to take advantage of growing trends ranging from the proliferation of LED usage to mercury control in coal-fired power plants. Both of these trends have the backing of governments the world over and are becoming more affordable due to technological advancements and scale.
In addition to these areas, Albemarle is exposed to a burgeoning deep-water oil & gas market – of which I am publicly bullish – and a refining business in the U.S. that has been readily expanding due to our newfound bounty of fossil fuel reserves. Helping all of these markets operate more efficiently bodes quite well for the company's long-term success.
Lighting the way
Going back to my undergraduate days, I had a physics professor that was absolutely obsessed with light emitting diodes, or LEDs. Nine years later, it is becoming increasingly obvious as to why. If only the calculus in that course didn't require so much of my undivided attention, I could have focused on the nascent industry a bit more.
According to McKinsey&Company, in an August 2012 study, the global lighting market will be worth approximately $135 billion in 2020. By their estimates, 70% of this market should be dominated by LEDs. What are some key drivers of this expected surge from 12% market share to 70%? Well, for one, governments around the globe are emphasizing the use of energy efficient equipment and materials. Given that lighting accounts for around 20% of all electricity consumption, this is an obvious area to target. Bans on incandescent lighting have already begun in some of the biggest nations around. You don't think office buildings and homes are going to revert candlelight do you? No, I didn't think so. Enter the more efficient, rugged and longer-living LED option.
How does Albemarle fit into this increasingly bright spot for the lighting industry? It's just part of the foundation... No big deal. The very construction of these diodes requires the structural support of the 'substrate'. This level of the diode is the base that supports and assists the growth of all other levels. It is a "substantial component of the material cost of the diode" and has a "significant impact on the yield and efficiency of the resulting LED." Sounds important right? Well the substrate level cannot be constructed without the metal organics that Albemarle is a leading supplier of. How's that for some entrenchment for you?
Scrub-a-Dub-Dub
Enjoy eating fresh fish on a regular basis? No matter how you choose to answer that question, I'm assuming everyone shares the same opinion on mercury poisoning. Among myriad issues surrounding coal-fired power plants, the emission of mercury is one of the more hotly debated. Ingesting fish that have been exposed to mercury is just one way this toxic metal can enter your body after being released from coal plants. If the sound of this is a bit disconcerting, then I bet you'll be a fan of Albemarle's mercury removal and testing offerings.
Some of you might not have noticed, but on October 10th, The Minamata Convention on Mercury was formally adopted as international law. That's how serious this issue has become. It was adopted by 139 governments and signed by 87. So for all of you who believe this is an issue relegated to the current Obama administration's Environmental Protection Agency, think again. This is a serious problem, and it is being dealt with on a global level.
Here in the United States, EPA regulations are cracking down on mercury emissions from coal-fired power plants. Here are a few recent examples of steps utilities have been taking to comply: a combined $2.1 billion will be spent by FirstEnergy (FE 1.44%), Indianapolis Power and Light, and the state of Minnesota to curb a portion of each entity's coal-fired mercury emissions by 80-91%. Utilities and states have been forced to make the difficult decision on how to handle coal plants. Three options are available: convert to natural gas, update with current scrubber technology or board up altogether.
For those that choose to install scrubbers, Albemarle is here to help. Its patented gas-phase bromination technology is four times more efficient than competitors' non-brominated Powdered Activated Carbon, or PAC, solutions. This choice isn't only resigned to existing plants either. All new plants that are built in the United States, and an increasingly larger pool of other countries, must control mercury emissions as well. Add this to the tailwinds that are likely to blow Albemarle's stock higher.
Current state of affairs
Now that I have laid out just a couple of growth opportunities that Albemarle has positioned itself to capitalize on, I'll dive into the financial foundation. Some of you likely have already pulled this company's financials up and might be wondering about the lack of top- and bottom-line growth that has been experienced the past couple of years. Well, let me quell any thoughts of Albemarle being a struggling business. The company has been a victim of circumstance the past two years. That circumstance has been a slower-than-expected recovery combined with expansion programs that pegged growth to have already accelerated.
In the company's second quarter conference call, CEO Luke Kissam, acknowledged the fact that Albemarle's growth spending was initiated 12-24 months too early. As a result, the company's financial performance has battled through 2012 and 2013. Despite this, management still firmly believes in the areas it chose to invest, and so do I.
It has expanded both its bromine and catalyst business units. Each of these has obvious opportunities once global growth realigns itself. It is my hope to 'get while the gettin' is good'. Is this a risk? Of course, but my optimism has defeated my doubts in this scenario.
In the meantime, I will sleep comfortably on the company's balance sheet mattress, which sports ample give in its Current Ratio springs and plenty of cash stuffed inside to cover its near-term obligations. I find it a stretch to call them dreams, but I will certainly be conjuring up images of a mercury-free, LED-lit world, compliments of the foundationary materials provided by Albemarle Corporation, during my power naps.
