Introduction
Ever since I visited the San Francisco Bay Area, I’ve been keeping an eye on local news.
The other day, I came across an interesting headline from the San Francisco Chronicle.
According to the article, Apple (AAPL) is laying off 614 employees in Santa Clara as part of its first mass job cuts in many years.
Interestingly, it’s not caused by consumer weakness, potential pressure on its iPhone, or struggles in AI. Instead, it is from the canceled plans of its electric vehicle (“EV”) project.
The move, which spans eight offices in Santa Clara, follows reports that the company canceled a decade-long electric car project. The filing did not mention the project, but affected roles include “machine shop” managers, hardware engineers and product design engineers.
Although Apple’s EV was never a big deal. We’re witnessing a trend of weakening euphoria in what used to be one of the hottest secular trends on the market.
Even Tesla, Inc. (TSLA), which may be considered the Western leader in EV technology, is trading 44% below its 52-week high.
Personally, I have never been a huge fan of this trend. Although I support innovation in the EV space and the fact that there are certainly great uses for electric cars, I always considered hybrids to be a more viable option – at least at this stage of the innovation cycle.
Hence, on March 20, I wrote an article titled “EVs Are Dead – Long Live Ford!”
In that article, I quoted The Verge, which hit the nail on the head when it wrote that EVs are struggling with mass adoption (emphasis added):
“EV adoption is looking to move into its next phase — requiring much more mass-market interest — and this larger cohort has to be sold on EVs since they aren’t as enthusiastic and willing as early adopters,” she said.
This will be much more challenging for dealers: converting a whole cohort of more trepidatious, price-sensitive shoppers to an entirely new technology. Buying an EV isn’t just about bigger screens, faux grilles, or light bars; it’s an entirely new lifestyle, full of range considerations and charging anxieties and home equipment installations. – The Verge
On April 4, Bloomberg reported that three major car nations, Japan, South Korea, and the U.S., have fallen behind their peers in EV adoption.
As we can see below, the adoption trend is slowing, pressured by high prices, a lack of EV variety, and “anxiety about the availability of public chargers.”
With that in mind, while I wasn’t a fan of the EV trend in the past, I have been bullish on Albemarle Corporation (NYSE:ALB), one of the largest lithium miners in the world.
My most recent article was written on December 10, when I went with the title “Down 60%, Albemarle Hasn’t Been This Cheap In Decades.”
Here’s a part of my takeaway:
The lithium industry faces headwinds, impacting ALB’s financials.
However, the company’s proactive cost management, strategic initiatives, and strong balance sheet demonstrate resilience.
With a focus on efficiency, ALB aims to navigate the current market environment successfully.
Meanwhile, the decline in lithium prices may be nearing its end, with projections indicating stabilization.
Since then, ALB has returned 0.2%, which is nothing compared to the S&P 500’s (SP500) 13.3% gain.
However, it’s a start – especially because EV-related headlines have only gotten worse since then and the company has seen aggressive analyst expectation downgrades.
Hence, in this article, I’ll update my thesis and discuss new developments impacting the company and its financials.
So, let’s get to it!
Struggles & Light At The End Of The Tunnel
Although I won’t spend too much time on Q4 2023 earnings, as we’re roughly three weeks away from Q1 2024 earnings (currently expected May 1st), I need to highlight that ALB isn’t doing so well in an environment with severe pricing headwinds.
For example, in the fourth quarter of 2023, the company reported net sales of $2.4 billion. This represents a 10% decrease compared to the prior year quarter.
The decline was attributed to lower lithium market pricing, although it was partially offset by increased volumes in the Energy Storage segment and higher volumes and pricing in Ketjen.
What’s interesting is that the company is seeing strong volumes but weak pricing.
It’s a bit comparable to oil companies in 2015 (although the industry fundamentals are very different). Oil companies had rapidly rising output but tremendous pricing headwinds that ruined the bottom line.
In the case of Albemarle, the company saw strong volume growth of 35% in 2023. This was supported by a strong demand for infrastructure, including mobility, energy, connectivity, and health.
We ended the year with net sales of $9.6 billion, up 31% compared to 2022, of which 21% was related to volume growth. Energy Storage delivered 35% volumetric growth in 2023. – ALB Q4 2023 Earnings Call.
However, pricing turned into a huge drag, as we just saw in the net sales decline of 10% in the fourth quarter.
With that in mind, it needs to be said that both 2021 and 2022 were outlier years, as lithium carbonate prices skyrocketed when “everyone” started to push hard for the EV transition. Currently, prices are still elevated compared to pre-pandemic years.
In light of these developments, in its Q4 2023 call, the company said that it remained optimistic about its long-term growth prospects, particularly in the electric vehicle sector.
As we can see below, it expects lithium demand to rise from 1.0 million metric tons in 2023 to more than 3.0 million metric tons by 2030. However, this is based on a 50% EV penetration by 2030, which I expect to be missed by a mile.
However, I expect that even a 30%-ish penetration should allow lithium volumes to double.
To be specific, the company highlighted its durable competitive advantages, including vertical integration, leading process chemistry, strategic partnerships, and commitment to sustainability.
By being a leader in the process of turning lithium into value-added products, the company aims to deliver strong value for shareholders, even in a challenging environment.
During the most recent BMO Capital Markets Investor Conference, the company elaborated on certain challenges, noting that because of poor pricing, key production sites like Greenbushes and Wodgina have witnessed production adjustments.
However, these are minor adjustments that can be turned back “immediately.”
In general, the company noted that major differences between production costs could be favorable. For example, as prices fluctuate, mines operating at higher costs may become economically unviable, leading to production cuts or closures.
Well, as you said, it’s a lot of mines, a lot of conversion across that cost curve. So it’s a lot of different pieces, but there are big chunks in there that are somewhere between $10 and $20 that will, from Lepidolite standpoint, and as prices dropped, we believe those will come out of the market, and that’s where the biggest chunk is. – ALB At BMO Capital Markets Conference.
Moreover, one issue in the sector is data visibility. It is hard to correctly estimate global production data. This is challenging, as lithium inventories in the EV supply chain, for example, are key to monitor as they impact pricing.
As a result of the current uncertainty, the company is considering reducing capital spending in 2025 once its Kemerton project is completed, provided that market conditions remain stable.
Overall, its volume outlook is very upbeat.
It also doesn’t help that the fragmentation of price indices and the immature nature of futures exchanges in this field add volatility and uncertainty.
In markets like oil, gold, and metals, that’s no issue.
With that said, in addition to maintaining flexible production volumes, the company is actively managing its non-core assets to strengthen its balance sheet.
In the first quarter of this year, the company worked on divesting certain investments, such as the Ketjen catalyst business, to optimize its portfolio.
Considerations are also being made regarding the sale of smaller stakes in lithium or spodumene developers, depending on market conditions and pricing.
As we can see below, financial flexibility is its second-biggest priority. It has $1.8 billion in liquidity and a long-term net leverage ratio of less than 2.5x EBITDA.
This year, analysts expect net debt to end up at $3.9 billion (3.3x EBITDA).
Next year, net debt is expected to fall to 2.2x EBITDA, which is solely expected to be provided by higher EBITDA. The company has an investment-grade BBB credit rating.
Going into this year, it had a net leverage ratio of 1.1x EBITDA, which shows just how volatile EBITDA has become.
Regarding future projects, Albemarle is considering the potential restart of operations at Kings Mountain and Richburg plants in the United States.
Valuation
It’s fair to say that the company’s EPS expectations have been “nuked” since my most recent article.
The table below shows the current analyst’s EPS outlook (compared to my prior article). The most recent numbers can be found in the FAST Graphs chart below.
Year | EPS Outlook (December) | EPS Outlook (Current) |
2024 | $12.64 | $3.53 |
2025 | $16.83 | $8.04 |
2026 | N/A | $9.44 |
In other words, even next year’s EPS result is expected to be half as good as initially expected.
The good news is that a lot of weakness has been priced in. After all, despite these adjustments, the stock price has not continued its decline(!).
Currently, ALB trades at a blended P/E ratio of 7.1x. That’s as cheap as it was during the depths of the Great Financial Crisis (2009).
Going back to 2004, it has a normalized P/E ratio of 17.2x. While it may take time for the stock to get back to that valuation, it does help that EPS is expected to recover to $9.44 by 2026 – even in this environment.
Applying a 17.2x multiple, we get a potential stock price target of $162, which is 32% above its current price.
The current consensus price target is $144.
Although this target is way below the prior $300 target, I believe ALB remains an attractive company. A lot of bad news has been priced in. And while EV manufacturers may struggle with a weaker adoption trend, the lithium demand outlook remains favorable for higher volumes and potentially higher pricing once sentiment improves.
In other words, given the challenges in the EV industry, I believe miners offer the best risk/reward as they avoid the increasing competition between car manufacturers.
Takeaway
As the EV trend faces headwinds and EV manufacturers struggle with weaker adoption, my focus continues to be on Albemarle.
Despite pricing challenges, ALB shows resilience through strong volume growth and strategic initiatives.
With an optimistic outlook on long-term lithium demand, ALB aims to navigate market uncertainties.
While EPS expectations have been revised downward, the stock’s current valuation presents an opportunity for investors.
Considering the challenges in the EV industry, mining companies like ALB offer a compelling risk/reward profile amidst increasing competition among car manufacturers.
Pros & Cons
Pros:
- Resilient Outlook: Despite pricing challenges, ALB maintains a positive long-term growth outlook.
- Strong Volume Growth: The company has shown strong volume growth, driven by increasing demand in infrastructure sectors like mobility, energy, connectivity, and health.
- Financial Flexibility: ALB prioritizes financial strength, with ample liquidity and a conservative leverage ratio.
- Attractive Valuation: Trading at historically low P/E ratios, ALB presents an attractive investment opportunity.
Cons:
- Pricing Headwinds: ALB faces challenges from lower lithium market pricing, impacting its financial performance despite strong volume growth.
- Market Volatility: The lithium industry is prone to price fluctuations and market uncertainties.
- EV Industry Challenges: In general, uncertainties in the electric vehicle sector may pose challenges to ALB’s growth projections in the short term.