Stocks of the leading lithium producer Albemarle (ALB 1.44%) are up 19% over the past year, erasing the 14% decline in the S&P 500 index. Why? Thank you to the electric vehicle (EV) market, which currently has an insatiable appetite for lithium. Albemarle quickly expands its activities to try and feed the beast.
The company recently reiterated its sales and profitability outlook despite signs that the global economy is hitting the brakes. After its big run this year, is Albemarle stock a buy?
Boost profitable growth
Albemarle’s third-quarter financials were impressive. Revenue soared 152% year over year to $2.1 billion. Net income was $897 million, compared to a net loss of $393 million at the same time in 2021. Adjusted EBITDA (which is used to evaluate the company’s operating performance) rose a staggering 447% to $1.19 billion US dollars as Albemarle ramps up mining production as lithium industry leader.
As epic as the numbers were, the results actually lived up to expectations. Legacy automakers off the sidelines and into the EV game. Lithium-ion batteries have already been prolific, powering billions of smartphones around the world. But car batteries dwarf the amount of lithium in a phone, and so far there are only about 20 to 30 million electric vehicles on the world’s roads. As more automakers electrify their vehicle ranges, lithium production will only see greater demand.
Then there are the megapack batteries that connect to the power grid to manage energy storage and distribution. It’s still early days for these, but the amount of lithium required for one of these massive batteries dwarfs that for smartphones or electric vehicles.
Long story short, Albemarle has a lot of demand but not enough lithium to get around. As a result, lithium prices remain at all-time highs, as they have been for well over a year.
How expensive is the stock really?
Albemarle has largely maintained its full-year 2022 financial guidance. Revenue is now expected to be in the range of $7.1 billion to $7.4 billion (previously $7.1 billion to $7.5 billion). That’s a 117% increase from 2021 at the midpoint of the forecast. Adjusted earnings per share are expected to be in the range of $19.75 to $21.75 (up from $19.25 to $22.25 previously).
As Albemarle’s profitability quickly climbed from zero to robust, the stock has suddenly become much more reasonably valued, management forecasts predicted earlier this year. Shares currently trade at about 23 times trailing-12-month earnings per share, or about 15 times expected full-year 2022 adjusted earnings per share (at the mid-point of guidance).
Make no mistake: While this company is growing rapidly, don’t think this is a “cheap” stock. All mining companies have cyclical operations. Any downturn in the EV market could have a major impact on the lithium market price and demand for Albemarle’s product. Admittedly, the company signs long-term contracts with its customers to try to offset potentially volatile lithium prices.
But Albemarle on this scale has not yet been tested. The market is still touting this stock for strong, sustained growth, and there are signs that even the electric vehicle industry may be on the verge of a breather. The economy is slowing, global consumers are having to adjust spending due to hot inflation, and automakers are reporting declining sales. Even Tesla’s growth could slow in the coming quarters due to disruptions in China and weaker sales in the U.S. and Europe.
While it may not be cheap, I still wouldn’t call Albemarle an expensive stock. Other lithium companies are trying to ramp up production to take advantage of the sales boom, but as electric vehicles continue to grow their share of the auto industry, there will be plenty of new demand over the next decade. Albemarle forecasts compound annual sales growth of 20% over 2022 through 2025 figures.
The third quarter earnings update was fantastic and I think Albemarle is a buy. However, given the inherent volatility that mining companies bring, I nibble on this stock every quarter and slowly add a few stocks to my existing position from time to time (Albemarle is just short of a 2% position in my portfolio). I would urge caution here, and advise other investors to do the same if you think this is a long-term growth story in the making.
Nicholas Rossolillo has positions in Albemarle and Tesla. Its clients may have positions in the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.