If You Believe In Lithium Battery Growth, Albemarle Is A Must Own

As the crossover in total costs to operate an electric vehicle [EV] vs. traditional gasoline-powered autos continue to push consumers in the green energy direction, demand for lithium-based batteries should rise dramatically over the next 10 years. And, real shortages in lithium supplies (including specialty processing for each OEM manufacturer) are projected to be the new normal for years. The industry growth-curve forecast for total lithium demand globally into 2030 is quite extraordinary, with nearly 300% more supplies needed annually in seven short years.

Last year's spike in prices to over 60,000 Chinese Yuan per ton from under 10,000 CY/T in 2021 may be just a hint of what is approaching for shortage pricing when EV demand accelerates in the next macroeconomic upcycle for autos.

What is the best risk-adjusted way to participate as an investor? My answer is easy and straightforward - Albemarle (NYSE:ALB) - the only large, diversified, blue-chip miner and processor based in America.

I discussed the bullish self-funded growth plan from leading lithium producer Albemarle in my October article here. Since then, the share quote has swung wildly, sitting 10% lower currently vs. my article post, as lithium prices have corrected in a material way with a slowing global economy. However, my long-term view of the company's exposure and setup to future shortages of lithium have not changed. In fact, the sub-$200 stock quote ($171 bottom) witnessed in April-May may prove the low price point in this name (absent a stock market crash in the U.S.).

World's Top Diversified Lithium Asset Setup

Across the board in terms of assets, both mining production and processing, diversification and location across the planet, with a leading financial foundation, Albemarle is far and away the best lithium play, in my view.

Below are slides from the company's early May Earnings Presentation for the Q1 2023 period ended in March. The highlights are: (1) a projected increase in production volumes approaching +200% by 2027 vs. last year, mostly financed with incredible cash flows coming in the door today; (2) conservative financials, with plenty of cash and little debt in early 2023; (3) flexible and variable long-term price contracts with customers to capture future lithium price gains; and (4), an unparalleled list of assets all over the world.

Low Valuation Argument

With the near certainty of tight supplies to match the major escalation in EV battery demand for many years, I am quite fascinated the stock quote has really gone nowhere since late 2021 (trading lower today than December 2021). The good news for investors is the valuation on both trailing and future results is now super-cheap. Below I have graphed the basic financial ratio setup, which is at a 10-year low, and approaching the least expensive since the Great Recession bottom in 2009. Of course, the lithium spike in price in 2022 is largely responsible for the undervaluation picture on "trailing" stats.

However, when we account for Albemarle's stellar balance sheet with $1.6 billion in cash and $3 billion in working capital, on top of only $3.5 billion in debt, the enterprise valuation for the whole business on "future" projected results in 2023-24 is equally in underpriced territory. On enterprise value vs. cash EBITDA or revenues, Albemarle is again approaching the cheapest setup since 2012, if not 2009.

In early 2023, profit margins are now in record territory for the company, a direct result of the lithium shortage and shrewd, conservative management decisions over a number of years.

Amazingly, Wall Street estimates are now trending "under" company guidance expectations. To me the below table of consensus Wall Street analyst projections is likely a "worst-case scenario," assuming the lithium price of May will not rise materially into 2024-25. I strongly disagree, and believe another surge, perhaps past last year's pricing remains a distinct possibility. And, with skyrocketing growth in production, EPS of $30 to $40 are reasonable projections by 2025-27, in my view.

Final Thoughts

The technical chart pattern is very neutral currently for momentum. Given the exaggerated price swings in lithium and Albemarle, you would expect some sort of clear signal on the next direction for price. Unfortunately, the next 10% of price change could be either up or down, based on the technical formation. However, I am rating a quote under $200 as Strong Buy territory, from the valuation setup and long-term lithium shortage story. Under $225 per share represents a Buy for starter positions, with a view to add on weakness.

What are the main risks on investment? Right now, the biggest downside would come from a deep and protracted recession globally. Stunted demand for EVs vs. present expectations could allow for new lithium supplies to be developed and mined, hitting the marketplace before demand completely outstrips inventories. Under this bearish scenario, lithium prices may remain flat or even decline into 2024.

Yet, I doubt the long-term bullish shortage situation can be avoided in the end. Sure, a one or two-year reprieve from severe shortage could occur, but green-energy EV acceptance and ramping purchase trends by consumers are still in their infancy.

Another risk is the overseas jurisdiction kind. Chile in late April announced a nationalization plan requiring a government ownership percentage on all new projects. Albemarle's contract to operate at Salar de Atacama lasts until 2043.

Albemarle's manager, Ignacio Mehech, met with state development agency Corfo, and repeated Chilean President Boric's statement about respecting current contracts as an "unequivocal sign to the market that lets us maximize our commitment in Chile."

My view is the Chile news event and selloff presented a great opportunity to buy shares, while related confusion may still be holding the quote in check during May.

I am projecting a double to triple in the share price for Albemarle over the next 3-5 years, good for total returns of +15% to +35% compounded annually. Where else can you find a leader in its industry, with deep value today, and a high-growth future dead ahead? Outside of a few smaller technology names, I cannot find many. Albemarle has a unique combination of safety, value, and growth investment characteristics, not easily found elsewhere. If you believe in the EV revolution and lithium batteries are the way forward for OEM manufacturers, Albemarle should be part of your portfolio. It is one of my top growth-at-a-reasonable-price [GARP] selections for new money today.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.