Will Tesla’s Recent Moves Impact Albemarle Stock?

by Trefis Team
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Albemarle Corporation (NYSE:ALB) is a chemical company that sells lithium – a key material used in electric vehicle batteries, bromine specialties, and catalysts. While demand for the company’s products fell across the board over the first half of this year due to the impact of Covid-19, the stock has fared quite well rising by about 32% year to date and is up by almost 90% from its March 2020 lows. This is partly due to the soaring interest in electric vehicle stocks which has buoyed lithium manufacturers as well. Could the stock trend higher still or is it poised for a decline? While Abermarle should continue to grow in the medium to long-term term, there are a couple of factors that make the stock risky at current levels. Below, we take a look at some of the trends that have driven Albemarle stock in recent years and what the outlook could be like for the company.

What Has Driven Albemarle’s Performance In Recent Years?

Let’s take a look at Albemarle’s performance over the last few years for a sense of how the company has been faring and what has driven its stock price in recent years. Albemarle’s stock declined from about $128 at the end of 2017 to $77 in 2018, as the euphoria surrounding lithium stocks as a hot investment trend over 2017 died down with lithium prices also trending lower. However, the stock has seen gains and trades at about $95 presently. While Albemarle’s Revenues have grown steadily from around $3.1 billion in 2017 to about $3.6 billion in 2019, driven by higher sales of Lithium (up 33% over two years) and Bromine specialties (up 17%), Net Income Margins rose from around 3% in 2017 to about 17% in 2019, with Net Income growing from around $100 million to about $604 million. The numbers in 2017 were depressed by some income tax charges relating partly to the one-time transition tax on earnings of certain foreign subsidiaries under the Tax Cuts and Jobs Act. For perspective, Albemarle’s Pre-tax Margins increased from around 14.5% in 2017 to 15.5% in 2019. Albemarle’s P/E multiple has risen from about 12x in 2018 to about 19x presently. See our analysis on What Drove Albemarle’s Stock Price Over The Last 3 Years? for an overview of what has driven Albemarle Stock.

What Are The Risks To Albemarle’s Stock?

Albemarle’s results have been a mixed bag over 2020, as Covid-19 impacted demand for chemicals and basic materials. Revenues declined by about 12% year-over-year during the first half of 2020 to $1.5 billion, driven primarily by the Catalysts business which was hurt by turmoil in the oil industry and weaker gasoline demand. The Lithium business didn’t fare too well either, with sales declining 15% year-over-year, as lithium prices trended lower. Albemarle’s Net Income declined by 33% over H1. The company’s Revenues are likely to fall by about 10% per consensus figures this year, with growth over 2021 also likely to remain somewhat muted. However, despite the weak earnings and near-term expectations, the stock has outperformed the S&P 500, which is up just about 7%, partly due to anticipation surrounding the longer-term prospects of its lithium business.

Although Albemarle estimates that demand for lithium from EV batteries is likely to grow 7x from 93 kilotons to 650 kilotons, between 2019 and 2025, there are risks here as well. [1] For example, electric vehicle bellwether Tesla has indicated that it would begin to mine its own lithium. Lithium is quite widely available and the process of extraction is key. Tesla says that it will use a new process to extract the material from clay ores in Nevada. Considering Tesla’s track record of innovation and disruption, there’s every possibility that it could upend the status quo in the lithium industry. Separately, per the announcements in its Battery Day event, Tesla is also looking to reduce lithium use on a per battery level and this could also hurt demand for lithium in the long-run.

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Notes:
  1. Albemarle Corporation Investor Presentation []
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