The global economy and Tesla (TSLA 0.28%) CEO Elon Musk’s diversion on Twitter have caused chaos in the rapidly expanding electric vehicle (EV) market. Inflation has been eating away at consumer budgets for over a year, causing a decline in the demand for new vehicles. Then there is unrest in China, the largest market for EVs. As a result of abandoning its zero-COVID-19 policy and coping with record infection rates, China’s economy is suffering, which translates to a feared decrease in car spending. Consequently, EV maker stocks have plummeted. (Also Read: The UK Treasury is considering a digital pound scheme.)
Even leading lithium producer Albemarle (ALB 2.81%) has not been spared the pain. Due to surging lithium prices, the company was able to withstand the bear market until the closing weeks of 2022. Albemarle stock may be in jeopardy for the new year as EV demand is uncertain.
For years, investors have been fascinated by EV manufacturer stocks for a good reason. Tesla has had a phenomenal run and has flipped the traditional auto business on its head — possibly for the better. Electrified vehicles may be the key to improved future profit margins for legacy automakers, despite the substantial technological investment required to produce them.
But rather than making investments in EV manufacturers, I’ve largely focused on businesses that make it possible for EVs to exist in the first place, such as lithium producers and semiconductor companies (lithium being the key ingredient in lithium-ion batteries that power an EV). Enter Albemarle.
Albemarle’s revenues and profits are increasing, as the corporation was an early adopter of lithium. It is presently the world’s leading producer of the yellowish element, with mining, refining, and materials technology facilities located across the globe. In the third quarter of 2022, total sales increased 152% year-over-year to $2.09 billion due to strong EV industry expansion and record lithium pricing. Albemarle’s net profitability has turned positive this year ($897 million in Q3) as its numerous lithium-producing locations have rapidly increased output.
Even while lithium prices have decreased from their all-time highs in late 2022, they remain sky-high due to a lack of supply for the influx of new EV models entering the market. This is anticipated to remain the same as EV models replace internal combustion engines over the next decade. The production cost of lithium-ion batteries has been a short-term hindrance for several automakers seeking to enter the EV market. Today, raw lithium’s price remains ten times higher than it was at the end of 2019.
Even though Albemarle has been recently impacted by Tesla and concerns about China’s economy, the business should still generate substantial revenue and profit in 2023 from its materials production.
Albemarle is an established lithium manufacturer that has invested in R&D to promote further lithium battery advancements. That will offer Albemarle an advantage against the many new market entrants hoping to cash in on skyrocketing lithium prices.
However, Albemarle’s current level of profitability could decline if the economy enters a recession in 2023, which has a negative impact on auto sales. Even while it signs long-term supply contracts with partners, some contracts contain pricing that fluctuates based on the price of lithium. Manufacturers are constantly looking for methods to lower the price of electric vehicles in anticipation of contract renewals.
The recent drop in Albemarle stock price suggests that investors may already be pricing in some economic slowdown. Despite management’s optimistic outlook for the fourth quarter of 2022, the stock is trading less than 17 times, trailing twelve-month EPS. This ratio is predicted to fall to just under 11 times the expected EPS for 2022. (at the midpoint of guidance).
Therefore, Albemarle’s high-profit margins provide a substantial safety net if the EV market declines in 2023. Even more so, Albemarle’s financial statements are pristine. To offset its $3.12 billion in debt, the corporation ended September 2022 with $1.38 billion in cash and equivalents and $1.16 billion in longer-term investments. Another thing that sets this international mining business apart is its high liquidity.
In any case, Albemarle, like all mining stocks, is extremely speculative, and I anticipate further wild price action this year. Assuming the share price of this leading lithium producer falls significantly in the last month of 2022, I may consider making a small investment in it again to hold it for the long term. (Also Read: 8 ways to make money with blockchain)
02 Feb 2023
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