Investment Thesis
Albemarle Corporation (ALB, Financial) is one of the most attractive opportunities for turnaround investors because of newly born macro tailwinds for lithium. The stock has been strongly corrected by the markets following lithium price drops and it appears that we have reached oversold conditions.
Albemarle is a cyclical stock with a $12 bn market cap that tends to rise for a few years and then drop sharply. Since more than two decades now, the stock has reached higher highs after rebounding on a higher low. I believe we are at the bottom point in this new cycle and that monetary easing across the globe, China stimulus and continued EV adoption will push the price of lithium and of the Albemarle stock up in the next few years.
Business and Sector Overview
Albemarle is a large American Chemicals company operating three divisions: lithium, bromine specialties and catalysts (Ketjen). The company is highly dependent on the prices of lithium, its core revenue segment being driven by lithium used in energy storage/batteries. The segment represents 73.6% of the company's revenue as per the below chart.
Higher demand for batteries across the globe generates higher revenue for the company, and lower demand has the opposite effect. With Korea generating 28.9%, China 27.1% and Japan 13.5% (in comparison the US generates only 9.7%) of the company's revenue, Albemarle is heavily dependent on demand for energy storage in East Asia.
Price of lithium (tradingeconomics.com)
Lithium is currently trading at 75,000 CNY per ton (roughly $10,600), down from a 600,000 CNY ($85,000) high in 2022. And with recent weakness in lithium prices and an economic slowdown in Asia, in particular in China that is now attempting to stimulate its economy, the price of lithium, as well as the stock and the financials of Albemarle have suffered in the past quarters.
Financials and Balance Sheet
Total revenue reached $9.62 bn in 2023, tripling in two years and carried by strong EV adoption in particular in China and supply chain constraints due to the reopening of the global economy post-covid. However, this year has truly been a year to forget with a 23% drop in revenue on an LTM basis and likely a sharper drop on a 2024 basis. Net income also fell from $1.57 bn to negative LTM income with -$500 mn recorded. Free cash flow will likely end at -$1.1 bn in 2024 before initiating a recovery to end 2026 cash flow positive with $348 mn expected.The recent decline in revenue and cash flow can however be seen as a correction before a continued uptrend.
Indeed, as visible on the above chart when we take the big picture, the company is still in line with the trendline and the recent stock sell-off is likely an opportunity to hop back into the train before the company continues to grow.A lot of the cash that has been accumulated over the strong years of 2021-2022 is sitting in the company's balance sheet. According to the last earnings report relative to Q2 2024, the balance sheet is healthy and the company is sitting on a pile of cash.CAPITAL STRUCTURE PICTUREWith $1.8 bn in cash and cash equivalents, a net debt of only 2.1x adjusted EBITDA and a healthy capital structure without any long-term debt maturing under the current high interest rate environment (first major maturity due end of 2025), the business has sufficient leeway to reorient its resources, to invest in growth and to withstand temporary headwinds.
Valuation
The stock is likely to be oversold and has currently a rating of “significantly undervalued” on GuruFocus.
Given current negative earnings, there are two metrics that can be used to value the stock: price to sales (P/S) and price to forward earnings (FWD P/E). From a P/S perspective, the stock is trading at 1.61x LTM despite sales decline, roughly below half of the 10-year median of 3.5x median P/S and the lowest level in over a decade.
Using the forward price to earnings metric and tabling the 2026 earnings instead of the 2025 ones (2026 being the year Albemarle is expected to return to cash flow positive levels), the stock trades at 15.8x which is also below the 10-year median of 20x. Albemarle's peer, Sociedad QuĂmica y Minera de Chile S.A. (SQM, Financial), with roughly the same market cap ($12 bn), is trading at 19x and 23x forward and trailing earnings respectively, and at around 3x P/S.
For all these reasons, the stock can be rightly considered to be significantly undervalued, especially given an improved outlook.
Growth Outlook and Key Risks Ahead
The business is highly dependent on two factors: the adoption of EV and the demand for energy storage in Asia.
As more and more charging stations are deployed, the growth of EV sales could accelerate tremendously in East Asia.
Long-term Lithium outlook (Albemarle, Q2 2024 earnings report)
With EVs becoming cheaper and expected to hit cost-parity with ICE vehicles in 2025-2026, demand growth of lithium is also expected to boom with the main growth share residing in EVs. The large stimulus in China with cheaper and more accessible debt financing should further boost demand for EVs and boost Albemarle's revenue. Forecasts show that Asia will account for 63% of the 115 mn new EVs sold worldwide over the next five years, with EVs accounting for 39% of new-car sales in the region by 2028. In 2022 already, China accounted for 58% of global sales of EVs and 70% of total EV production.The high dependency on lithium and on East Asia are both a big growth potential and the key risk for Albemarle. If EV adoption slows down or the stimulus package in China does not provide the expected demand boost, then Albemarle's will continue declining or stagnating and its free cash flow may not recover by the end of 2025, when large long-term debt maturities and hence balance sheet rotation are due.
Bottom Line
Albemarle is a highly attractive turnaround opportunity with potential to outperform the markets as EV adoption picks up and the stimulus package boosts demand in China. The stock has been sold off by the markets and is likely oversold based on traditional valuation metrics. With a healthy balance sheet and a sufficient cash pile to withstand temporary headwinds, the company is at an inflexion point and could well pursue its rising trendline, aiming for a new all-time high in this new cycle. Albemarle is best suitable for turnaround investors within a diversified portfolio with 2026 and beyond as time horizon.
