Albemarle And Other EV Vendor Stocks Are Having A Tough Year. What Lies Ahead?

Our theme of EV Supplier stocks – which includes companies such as Albemarle stock (NYSE:ALB) and TE Connectivity stock (NYSE:TEL) that supply components and raw materials used in the manufacture of electric vehicles – has been a weak performer this year, declining by about 7% year-to-date, compared to the S&P 500 which has gained over 18% over the same time frame. To be sure, EV sales have continued to grow steadily this year. In the U.S. sales of battery-electric vehicles have risen by about 49% over the first nine months, to  873,082 units per data from Cox Automotive. However, it appears that demand is not meeting the lofty expectations of automakers and their suppliers who have invested considerably into the space. While high interest rates are making monthly payments on vehicles more expensive for customers, players such as Tesla have continued to expand at a solid rate, but mainstream automakers are seeing softer-than-expected demand. For example, GM said that it would delay production of its Chevrolet Silverado and GMC Sierra electric pickup trucks at a plant in Michigan by one year, while Ford indicated that it would be temporarily cutting one of three shifts at the factory that builds its electrified F-150 Lightning pickup truck. The market for key battery inputs is also telling, with prices for lithium carbonate in China – one the biggest battery manufacturing hubs in the world – declining by almost 75% year-to-date. Moreover, price cuts in the EV space by bellwether Tesla over the last two quarters have triggered a price war, particularly in the sizable Chinese EV market. This could be weighing on supplier stocks to an extent, as lower selling prices could mean more stringent component cost management on the part of OEMs.

ALB stock has seen a decline of 15% from levels of $150 in early January 2021 to around $125 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the decrease in ALB stock has been far from consistent. Returns for the stock were 58% in 2021, -7% in 2022, and -43% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that ALB underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, RIO, and SHW, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ALB face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Although there are near-term headwinds, the longer-term outlook remains intact for the theme. The total light vehicle market stood at about 90 million units prior to Covid-19. It’s quite likely that the passenger vehicle market will transition almost entirely to EVs in the coming decades, providing meaningful room for expansion for EV suppliers. Unlike the EV market, which has low barriers to entry, with competition mounting, top EV component suppliers should stand to benefit irrespective of which automakers eventually win the market share battle in the EV space.  Within our theme, TE Connectivity, a company that sells a range of connectivity and sensor solutions, has been the strongest performer, rising by about 14% year-to-date. On the other side, Albemarle, a specialty chemicals manufacturing company, that is also one of the leading lithium producers, has been the weakest performer with its stock falling 43% year-to-date.

[1] Month-to-date and year-to-date as of 11/29/2023
[2] Cumulative total returns since the end of 2016