Much like the stocks we've been writing about this week, like Ethan Allen (NYSE: ETD), this chemicals company has felt the effects of an electric vehicle (EV) slump in the last few quarters. But there are signs things are about to change.
Albemarle Corporation (NYSE: ALB) is a global leader in the specialty chemicals sector. It is well known for its critical role in providing lithium for energy storage solutions (read: electric vehicle batteries). In Q1 2024, Albemarle reported net sales of $1.4 billion, driven by substantial growth in energy storage volumes. Despite a year-over-year decline in net sales and a substantial drop in adjusted EBITDA, the company has been proactive in implementing strategic initiatives.
EV' Picks and Axes'
The global shift towards renewable energy and the transition to electric vehicles are significant trends benefiting Albemarle.
According to the International Energy Agency (IEA), the number of EVs on the road is expected to reach 230 million by 2030 under the stated policies scenario, from 16 million in 2022. In a highly competitive market where companies like Tesla (NASDAQ: TSLA) and BYD (OTCMKTS: BYDDY) vie for the top spot, smart investors flee to the providers of 'picks and axes' - in other words, suppliers that may be lower on the value chain but benefit from the massive EV tailwind without all of the competition. And that's exactly what Albemarle offers.
Global EV sales have increased by 20% year-to-date, with China leading this growth. As a critical supplier in the EV supply chain, Albemarle stands to benefit substantially from this trend. Positive sales trends in Europe and North America further bolster the company's outlook.
Increasing Capacity
Albemarle has made significant strides in its project developments, enhancing production volumes and operational efficiency. Lithium is extracted and processed in three different ways:
- Brine Extraction: Pumping lithium-rich brine from underground aquifers into evaporation ponds, where it is concentrated and processed. This is by far the most popular extraction method, and it happens mainly in Chile, Argentina, and Bolivia. Albermarle's Salar Yield Improvement project achieved a 50% operating rate milestone this quarter.
- Hard Rock (Spodumene) Mining: Extracting spodumene ore from mines, then crushing, heating, and chemically processing it to produce lithium compounds. Spodumene mining is predominant in Australia, where the company's Kemerton I facility is being commissioned.
- Clay Extraction: Mining lithium-rich clays and treating them with sulfuric acid at high temperatures to extract and convert lithium into usable forms.
These advancements are crucial for meeting the growing demand for lithium and improving efficiency. Additionally, Albemarle's focus on productivity has resulted in $90 million in cost savings in Q1 2024, aligning with its annual target of $280 million.
The company has also set up strategic "bidding events" for spodumene concentrate and lithium carbonate. In general, the lithium industry is opaque, with bilateral contracts and negotiations that are not seen by the larger market.
Albemarle promotes price transparency and discovery in the market by promoting bidding events where the company's products are bought through an auction process. These events are designed to ensure fair pricing and provide real-time insights into market dynamics, attracting more clients that value transparency and fair play.
Financial Outlook
While Albemarle faced challenges in Q1 2024, the company's financial outlook for the remainder of the year remains strong. For FY 2024, Albemarle expects net sales to range between $5.5 billion and $7.6 billion, with adjusted EBITDA projected between $0.9 billion and $2.6 billion. Despite the short-term setbacks, Albemarle is committed to its investment-grade credit rating and strong liquidity position, boasting $2.1 billion in cash and equivalents and $3.5 billion in total debt.
Analysts have taken note. The consensus price target for the stock is 29% above current prices, with several target boosts in May alone.
In Short
Investing in Albemarle does come with risks, such as fluctuations in lithium market prices and potential production volume shortfalls. However, these risks are mitigated by the company's ongoing productivity improvements, massive EV tailwind, and a strong balance sheet.
Investors interested in investing in the EV theme through a 'picks and axes' strategy should consider Albemarle because of its strong fundamentals and market position.