(Albemarle) (ALB)
Overview of the Company - Albemarle is a chemicals company that mines lithium and other industrial chemicals. Their lithium is used in consumer electronics and batteries of electric cars. Their other chemicals are used in products from crop protection to beef and poultry processing. This broad range of products allows ALB to have a pretty large moat and protect the key growth in their business - Lithium.
Fundamental Analysis - Albemarle has a large moat surrounding business consisting of products that are essential to everyday life and businesses. Their lithium production is really where the growth is for this company. Electric vehicles are going to be the future and all electric vehicles will need lithium to produce their batteries. There is a reason why Rivian will IPO tomorrow at around a $60-$85 billion dollar evaluation. Additionally, the huge infrastructure bill that Congress has recently passed will help companies like Albemarle as they need to continue to supply the ever growing economy. Moreover, ALB is highly tied to the commodity market, which is usually a great hedge for inflation and Albemarle should see minimum effects of high interest rates and transitory inflation.
How (ALB) Stacks Up to Competitors - I will be comparing ALbemarle to other lithium producing companies. First, Lithium Americas Corp. (LAC) (Market cap: $4 billion) which explores for lithium deposits and Piedmont Lithium (PLL) (Market cap: $1 billion) which recently signed a 5 year contract with Tesla promising to purchase at least ⅓ of their supply. All three companies stand to benefit from the rising electric vehicle market, but a key difference is that Albemarle (Market cap: $32 billion) also is involved in other industries, while LAC and PLL are almost pure play lithium stocks, with PLL pretty much tied to one plot of land in Carolina that they are planning to mine in the hopes of bringing mining of this metal back to America from oversees competition. These companies will be difficult to compare as both LAC and PLL are smaller and more speculative and have not yet reached consistent profitability. This is demonstrated very well in the short ratio - ALB’s share float is 2% short while LAC is 9% and PLL is 5%. Clearly, institutional investors think that this run has been extended too long. It truly comes down to if the deal with Tesla goes through and PLL will be able to to mine their Carolina plot of land and if LAC is able achieve profitability soon. On the flip side ALB is trading comfortable at a forward P/E of <70x and has consistently beat earnings over the four quarters.
Bull Case - While the forward P/E looks stretched at around 68x - it is nothing compared to the growth projected for electric vehicle makers. Albemarle will epxiecree growth not only in their lithium business, but also their core business thanks to the infrastructure bill.
Bear Case - ALB already has too much growth baked into the stock price. Trading at 150x earnings for a company that produces chemicals is way too much growth and the company will experience severe consolidation if they are not able to continue to beat incredibly high earnings expectations. The EV space is reminiscent of a bubble and unfactual, even chemical companies like ALB will be affected when it bursts.
Valuation and My Price Target - I believe Albemarle will be able to beat expectations for the coming year and achieve EPS of $4.50 - which puts their forward P/E at 61x. I believe this is going to be way too cheap for this well-ee-etated company. I do not see a reason as to why this company will not be able to trade at a fraction of their current multiple - 75x. With EPS at $4.50 - this comes out to a one year price target of $337. Perfectly reasonable for a company that is going to see incredible growth thanks to their lithium business, but also protection from any setbacks because of their strong core e business.
The Verdict - BUY HOLD SELL
Albemarle is an established company with a combination of stable products that sell to industries that will benefit from an expanding economy, but also incorporates a large part of their business in an ever fast growing sector of the economy in green energy, batteries, and electric vehicles. With a lot of growth ahead and a price target of $337 indicating 21% returns, I think ALB is currently a BUY.
*all data provided by yahoo finance and nasdaq.com and
https://www.reuters.com/business/energy/piedmont-says-has-delayed-timeline-supply-lithium-tesla-2021-08-02/