Albemarle ALB released its third-quarter earnings report on Nov. 1. Here’s Morningstar’s take on Albemarle’s earnings and stock.
Key Morningstar Metrics for Albemarle
Fair Value Estimate: $300.00
Morningstar Rating: 5 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: High
What We Thought of Albemarle’s Q3 Earnings
Albemarle’s earnings showed the effect of lower lithium prices on its profits. Albemarle had multiple downgrades and saw its stock price fall as the consensus expected that lower lithium prices would weigh on third-quarter earnings.
Albemarle’s results highlight the cyclicality of lithium due to fluctuating prices. While the market is focusing on lower near-term lithium prices, we think the more important takeaway is that lithium demand growth remains strong due to rising electric vehicle sales and the buildout of energy storage systems (utility-scale batteries). In our view, this should lead to lithium prices remaining well above historical levels, leading to solid profit generation for Albemarle, since lithium will be one of the largest beneficiaries of growing EV adoption. While lithium prices, profits, and Albemarle’s stock price will likely remain volatile, we see a strong demand environment for years to come.
The current stock price assumes lithium prices fall well below the marginal cost of production and remain lower, closer to historical levels. We view this scenario as unlikely, as solid demand growth will require higher-cost supply to remain in production, which supports higher prices and profits than what is implied in Albemarle’s current stock price. We think the market is overly pessimistic about Albemarle’s future profits, but as it’s one of the lowest-cost lithium producers in the world, we think it should see solid profit generation even amid lower lithium prices.
Albemarle Stock Price
Fair Value Estimate for Albemarle
With its 5-star rating, we believe Albemarle’s stock is undervalued compared with our long-term fair value estimate.
Our fair value estimate is $300 per share. We assume roughly a 10% weighted average cost of capital. We use a multiple of 11.5 times midcycle EBITDA to value free cash flows generated beyond our 10-year explicit forecast horizon.
The bulk of the growth will come from lithium. We expect contract lithium prices will rise on average in 2023. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $23,000 per metric ton (based on published indexes), down from $75,000 at the end of 2022, due to slowing lithium purchases as a result of inventory destocking. However, as demand growth remains strong and outpaces supply, we expect prices will stabilize during the end of the year and rise in 2024.
In the longer term, we expect lithium prices will remain well above our long-term forecast for lithium carbonate at $12,000 per metric ton through the rest of the decade. Based on our price elasticity analysis, we forecast index prices will average a little over $30,000 per metric ton range during the remainder of the decade. We expect high-quality lithium hydroxide used in long-range batteries will continue to sell at a premium to carbonate, reflecting higher conversion costs.
Read more about Albemarle’s fair value estimate.not advice
