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Want to Invest in Electric Vehicles? Take a Hard Look at Albemarle

Lithium is a hot commodity right now. It’s been an important ingredient in the tech sector for decades given that lithium-ion batteries power so many devices like smartphones, tablets, and laptops. But demand is soaring as adoption of electric vehicles (EVs) accelerates. By some measures, the price of lithium has more than doubled since the start of 2022. 
Enter Albemarle (NYSE: ALB), a leading supplier of lithium and other basic materials used in battery manufacturing. Thanks to strong demand in Q1 2022 and an upgraded outlook on future production, the stock is beating the overall market this year — Albemarle stock is down 8% as of this writing, compared to the S&P 500’s negative 17% return year-to-date. This is an “expensive” stock with lots of future growth already baked in, so tread lightly. But if you’re looking for a way to bet on the EV market, Albemarle is worth a look. 
Image source: Getty Images.

A quarterly earnings beat and guidance raise
Albemarle got 2022 started right. Revenue and adjusted EBITDA were both higher than forecast in Q1, coming in at $1.13 billion (up 36% year-over-year, or up 44% when excluding the sale of its Fine Chemistry Services segment last June) and $432 million (up 88% year-over-year) respectively. Earnings per share were $2.15, up from just $0.84 a year ago. 
More importantly, Albemarle once again raised its expectations for full-year 2022 financial results. Revenue is now forecast to be $5.2 billion to $5.6 billion, up 60% to 70% compared to 2021 (with 27% to 36% growth projected three months ago). Adjusted EBITDA margin should be in a range of 33% to 36% (compared to guidance for 27% to 29% adjusted EBITDA margin before). Adjusted earnings per share should be in a range of $9.25 to $12.25, valuing Albemarle stock at 24 times to 18 times expected 2022 adjusted earnings.
Before delving into the reasons why this valuation might give investors pause, let’s note what Albemarle does and why it’s boosting its anticipated financial performance. The real needle-mover for Albemarle is lithium, and tight supply of the base element has boosted prices, in turn lifting the company’s sales and profit margins. 70% to 80% of revenue this year is expected to come from battery-grade materials. Albemarle is bringing new supply to market to meet this demand (a mine in Australia restarted production in Q1) coming primarily from auto manufacturers moving more of their vehicle lineups to EVs. 

Material

Q1 2022 % of Total Revenue

Q1 2022 Adjusted EBITDA

Full-Year 2022 Adjusted EBITDA Outlook

Lithium (batteries and electronics)

49%

$309 million

200% to 225% growth

Bromine (fire safety, electronics)

32%

$129 million

15% to 20% growth

Catalysts (fossil fuel refining)

19%

$16.9 million

Flat to down 65%

EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Albemarle. 
Clearly this company is a bet on the materials used in the electrification of vehicles and battery technology overall. Of note, a strategic analysis of the catalyst business is underway (read: Albemarle might sell this segment tied to fuel refining), and is expected to be completed by the end of this year. If the company does indeed sell this segment, it will become an even more focused bet on supplying raw materials for the battery industry. 
Is all the future expansion worth the price tag?
Now about the valuation on this stock. Albemarle CFO Scott Tozier said on the earnings call that there would be further upside to 2022 guidance “if current [lithium] market prices remain at historically strong levels for the balance of the year.” About 30% of the company’s lithium sales are on fixed-price contracts, and the company is working with customers to transition to a variable-price model based on lithium market prices. If those contracts are switched and lithium prices remain strong, that would also be a positive. 
But therein lies the rub with investing in companies like Albemarle. Basic material miners can increase production to boost sales if the demand is there, but the market for these materials can just as easily take a turn for the worse. Basically, Albemarle is a cyclical business model, and its fortunes will ebb and flow with demand for lithium, batteries, and the burgeoning EV market. 
Given this dynamic, paying over 20 times expected adjusted earnings might be a steep price tag for a mining stock. A lot of future growth and profitability is priced in at today’s share price. If you decide to buy, do so cautiously. Personally, I start a position in a new stock that’s less than 1% of my total portfolio value and buy more over time as the growth story plays out.
Nevertheless, the EV market is expected to experience rapid growth in the next decade and beyond, and lithium is poised to be an important ingredient in this expansion. Albemarle is one of the leaders in this space, and could be a fantastic play on the electrification of the economy.
Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

Lithium is a hot commodity right now. It’s been an important ingredient in the tech sector for decades given that lithium-ion batteries power so many devices like smartphones, tablets, and laptops. But demand is soaring as adoption of electric vehicles (EVs) accelerates. By some measures, the price of lithium has more than doubled since the start of 2022. 

Enter Albemarle (NYSE: ALB), a leading supplier of lithium and other basic materials used in battery manufacturing. Thanks to strong demand in Q1 2022 and an upgraded outlook on future production, the stock is beating the overall market this year — Albemarle stock is down 8% as of this writing, compared to the S&P 500’s negative 17% return year-to-date. This is an “expensive” stock with lots of future growth already baked in, so tread lightly. But if you’re looking for a way to bet on the EV market, Albemarle is worth a look. 

Image source: Getty Images.

A quarterly earnings beat and guidance raise

Albemarle got 2022 started right. Revenue and adjusted EBITDA were both higher than forecast in Q1, coming in at $1.13 billion (up 36% year-over-year, or up 44% when excluding the sale of its Fine Chemistry Services segment last June) and $432 million (up 88% year-over-year) respectively. Earnings per share were $2.15, up from just $0.84 a year ago. 

More importantly, Albemarle once again raised its expectations for full-year 2022 financial results. Revenue is now forecast to be $5.2 billion to $5.6 billion, up 60% to 70% compared to 2021 (with 27% to 36% growth projected three months ago). Adjusted EBITDA margin should be in a range of 33% to 36% (compared to guidance for 27% to 29% adjusted EBITDA margin before). Adjusted earnings per share should be in a range of $9.25 to $12.25, valuing Albemarle stock at 24 times to 18 times expected 2022 adjusted earnings.

Before delving into the reasons why this valuation might give investors pause, let’s note what Albemarle does and why it’s boosting its anticipated financial performance. The real needle-mover for Albemarle is lithium, and tight supply of the base element has boosted prices, in turn lifting the company’s sales and profit margins. 70% to 80% of revenue this year is expected to come from battery-grade materials. Albemarle is bringing new supply to market to meet this demand (a mine in Australia restarted production in Q1) coming primarily from auto manufacturers moving more of their vehicle lineups to EVs. 

Material

Q1 2022 % of Total Revenue

Q1 2022 Adjusted EBITDA

Full-Year 2022 Adjusted EBITDA Outlook

Lithium (batteries and electronics)

49%

$309 million

200% to 225% growth

Bromine (fire safety, electronics)

32%

$129 million

15% to 20% growth

Catalysts (fossil fuel refining)

19%

$16.9 million

Flat to down 65%

EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Albemarle. 

Clearly this company is a bet on the materials used in the electrification of vehicles and battery technology overall. Of note, a strategic analysis of the catalyst business is underway (read: Albemarle might sell this segment tied to fuel refining), and is expected to be completed by the end of this year. If the company does indeed sell this segment, it will become an even more focused bet on supplying raw materials for the battery industry. 

Is all the future expansion worth the price tag?

Now about the valuation on this stock. Albemarle CFO Scott Tozier said on the earnings call that there would be further upside to 2022 guidance “if current [lithium] market prices remain at historically strong levels for the balance of the year.” About 30% of the company’s lithium sales are on fixed-price contracts, and the company is working with customers to transition to a variable-price model based on lithium market prices. If those contracts are switched and lithium prices remain strong, that would also be a positive. 

But therein lies the rub with investing in companies like Albemarle. Basic material miners can increase production to boost sales if the demand is there, but the market for these materials can just as easily take a turn for the worse. Basically, Albemarle is a cyclical business model, and its fortunes will ebb and flow with demand for lithium, batteries, and the burgeoning EV market

Given this dynamic, paying over 20 times expected adjusted earnings might be a steep price tag for a mining stock. A lot of future growth and profitability is priced in at today’s share price. If you decide to buy, do so cautiously. Personally, I start a position in a new stock that’s less than 1% of my total portfolio value and buy more over time as the growth story plays out.

Nevertheless, the EV market is expected to experience rapid growth in the next decade and beyond, and lithium is poised to be an important ingredient in this expansion. Albemarle is one of the leaders in this space, and could be a fantastic play on the electrification of the economy.

Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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