Albemarle: An Undervalued Dividend Aristocrat That Consistently Delivers

Albemarle (NYSE:ALB) has had quite a journey over the last decade. The firm has gone from a boring old miner and dividend to aristocrat to one of the hottest tangential plays on the market's Electric Vehicle ("EV") technological revolution. Lithium was historically much less central to the business than it is now. And while the stock soared on Lithium becoming more central to its business as the hype into electric vehicles rose, the other side of the coin has been prevalent in the last year as enthusiasm damped and lithium prices fell.

Even with the recent price weakness, though, the firm has still slightly outperformed the S&P 500 (SPY) on a five-year basis. I suspect over the next year or two, Albemarle will continue delivering. The firm has experienced fantastic growth over the past years. While it is known primarily for its role in producing critical components for energy storage, namely the batteries used in electric vehicles, it is a solid and established company with a lot of value behind this headline-grabbing characteristic.

There are wide divergences in expectations for next year's earnings. This is inherently an opportunity, particularly given the firm's attractive valuations. One other Seeking Alpha contributor made a splendid case for why this cyclical mining firm seems to be in a trough. If you can endure some short-term price weakness and even use it to accumulate a more prominent position with a higher effective yield and lower cost basis, this name could soar in the next year.

The estimates for next year's earnings are $23.34 per share. The lower end is $16.53, but the higher end is $38.90. This company has demonstrated that it can overperform consensus estimates often. As you can see below, the stock is undervalued by nearly every valuation method in my value investing software. It is rare to see that and given the company's prominence in a transformational technological trend, I think this is a significant opportunity for long-term shareholders.

There are a few reasons why I continue to like this company as a shareholder despite the recent weakness. Given that this firm is a crucial supplier for a technological revolution in its early stages (even if initial expectations were higher than reality), owning the stock for at least a decade is where you'll get some alpha in this name. The Seeking Alpha Quant Model, which I greatly respect, also rates it superior to its peers on several metrics.

The firm's current price means this stock has been cut since recent peaks. There has been significant weakness in Lithium, which will eventually filter into margins. However, this won't happen immediately because much of the firm's lithium business occurs based on negotiated contracts over an extended period.

The picture is also primarily favorable when looking at the mining stalwart on a relative valuation basis. Mostly, the firm is in line or relatively undervalued when compared with peers. I think the most compelling statistic is Albemarle's very low PEG ratio. However, the valuation picture is much more enticing and compelling when you look at Albemarle's financial effectiveness compared to industry averages and peers.

Financial effectiveness should always be one of the things you pay attention to as a shareholder. If you are the teacher (in your position as a shareholder) and the company is your student, consider the analysis of their financial effectiveness akin to their report card. Albemarle's superiority in this department would usually garner a premium, and it often has over past years. This is a crucial reason why the stock's attractiveness exceeds even what low multiples imply.

Despite this potential headwind and the growing chorus with legitimate criticisms of grand EV plans, the firm is still in a central spot of an emerging technological trend that significantly alters the economy. But there are other reasons I like this stock besides being a straight commodity play. Here is the bull case broken down into a few key points.

The firm consistently beats expectations and has grown into substantial investor expectations for output, growing quality and breadth of assets, and maintaining a central and dominant competitive position in the lithium space. We are entering a period of relative uncertainty coupled with a larger-than-usual margin of safety for this high-quality firm.

As you can see, expectations are diverging significantly over how the firm will perform over the next few years. I believe in this firm's management and strategy. I think the firm will continue to exceed expectations and create value for shareholders while being a primary supplier to a significant transformational technological change happening worldwide.

Risks and Where I Could Be Wrong

The share price performance over the last year shows one of the significant risks of owning a cyclical name where commodity prices are a crucial driver of margins. Furthermore, wild-eyed lithium demand projections have fallen over past quarters but are still considerable. One of the main drivers of weak lithium prices has been economic weakness in China. If this exceeds expectations or gets materially worse, then Albemarle's ungainly share price decline of the past months could continue.

There is typically a fourth-quarter uptick in Chinese lithium demand that appears to be weaker than normal if it is materializing. While this could lead to continued share weakness if it's worse and has greater duration than expected, I'd still say this presents an opportunity to accumulate and lower your cost basis. I will be building a considerable position in the coming months.

I am betting that the two-year low in lithium prices is near the bottom and that the crescendo of doubt about electric vehicles will steadily be washed away by consumers buying more and more of them. Yes, ambitious plans with doubtful cost structures may result in some failure. But all of the plans won't fail. And despite some reticence on the part of consumers to make the tremendous electric switch, as long as current technological trends stay roughly the same, EVs will be a big part of the picture. Hybrids may gain some traction, but they still need a lot of Lithium.

One of the immense risks to the long-term story that Albemarle management has told shareholders will be if a technology not currently thought to have the capability of economic and technological dominance shatters expectations. One such technology could be Hydrogen fuel cells, or perhaps even a technology that is yet known.

There have been building concerns about the environmental impact of lithium mining. Recent efforts to mitigate the environmental impact of lithium mining, which had been growing in the public consciousness with the backlash to green energy, have been announced in a partnership with Caterpillar to create sustainable mining operations. This should help mitigate the building's environmental risk.

The firm will likely benefit over the next decade from US efforts to harden the supply chain and to create a competitive alternative to China's considerable competitive advantage in battery technology and scale. However, there is also a risk that US efforts create perverse incentives that make Albemarle's business less competitive than foreign firms.

Conclusion

Albemarle is a high-quality company with a proven strategy that continues to evolve in ways favorable to shareholders. This company had the dominant competitive position in lithium mining and also has other attractive segments to balance it from being a straight commodity play. Some products, like flame-retardant materials, could dazzle investors beyond current expectations. The firm is attractively valued and is mainly recommended by analysts at price targets that create considerable upside.

Furthermore, this company consistently beats on earnings reports, and I think it has structured itself to endure a period of even sustained low lithium prices. While doubt has been building about some aspects of the future of electric vehicles, there is no doubt that they and the lithium-powered batteries that make them possible have a central place in our economic future.

Albemarle currently has the top spot as a supplier of Lithium. Still, more importantly for long-term investors, the company has demonstrated the capital discipline and strategy to keep that top spot for the foreseeable future. Albemarle is a high-quality, very cheap dividend aristocrat that merits a close look. This is a company you can feel comfortable owning for the long haul.