After Earnings, Is Albemarle Stock a Buy, a Sell, or Fairly Valued?

Albemarle ALB released its fourth-quarter earnings report on Feb. 12. Here’s Morningstar’s take on Albemarle’s earnings and stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $225.00
• Morningstar Rating: ★★★★★
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Albemarle’s Earnings

Albemarle shares rose after the firm’s earnings release, as unit cost reductions more than offset lower lithium prices to generate profit growth versus the prior-year quarter. The company also announced it could generate breakeven free cash flow in 2025 without lithium prices rising.

Why it matters: As lithium prices fell from all-time highs in late 2022 to cyclically low levels over the past two years, Albemarle invested heavily in new growth projects and ramped up new capacity as it was built. This resulted in negative free cash flow and temporarily higher unit costs.

• In response to low prices, Albemarle stopped investing in new lithium growth projects in 2024. In 2025, capital expenditures will fall to less than half of 2024 levels. Lower capex levels should let the company generate positive free cash flow by 2026, even if lithium prices remain low.
• The company also began a cost reduction plan. Reduced overhead costs and higher production from its new lithium projects will lower unit production costs. Lower costs will allow Albemarle to generate profit growth and higher margins even if lithium prices do not recover.

The bottom line: We maintain our fair value estimate of $225 per share for Albemarle. The results and guidance for 2025 are in line with our forecast that the firm will see greatly reduced unit production costs, driving margin expansion.

• We also think Albemarle will benefit from higher average lithium prices in 2025. We see prices remaining around current levels for the first half of the year. However, as demand growth remains strong we expect prices will rise modestly by the end of 2025.
• At current prices, we view Albemarle shares as materially undervalued, with the stock trading in 5-star territory. We point to rising prices and falling unit production costs as two catalysts for the stock in 2025.

Fair Value Estimate for Albemarle

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $225 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.

Lithium will remain Albemarle’s largest business. We expect lithium prices will remain at cyclically low levels in 2024. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $12,700 per metric ton (based on published indexes), down from $75,000 at the end of 2022. Prices fell due to slowing lithium purchases after inventory destocking. However, as demand growth remains strong, we expect prices will rise in 2025.

Read more about Albemarle’s fair value estimate.

Economic Moat Rating

We award Albemarle a narrow moat based on its strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either lower-cost brine evaporation or higher-cost mining of spodumene minerals.

Albemarle has a cost advantage in lithium carbonate production due to its lucrative brine assets in the Salar de Atacama in Chile, which produces lithium at the lowest cost globally, excluding royalties. The firm’s advantaged position in bromine comes from its low-cost and long-lived assets in the Dead Sea and Arkansas. Production costs are largely determined by concentration, as higher concentration means less water needs to be evaporated to produce bromine from brine.

Read more about Albemarle’s economic moat.

Financial Strength

Albemarle is in poor financial health. As of Dec. 31, management reported net debt/adjusted EBITDA was 2.6 times, slightly above management’s long-term target of less than 2.5.

We forecast adjusted EBITDA to rise slightly in 2025 due to a modest increase in lithium prices and lower unit production costs. Amid cyclically low lithium prices and negative free cash flow generation, the company plans to greatly reduce capital expenditures by over 50% in 2025. Albemarle also plans to reduce operating expenses. As its new plants ramp up and cost reductions are implemented, we expect Albemarle could begin to see improved EBIDA even if lithium prices remain lower for longer as soon as the second half of 2025. However, we expect free cash flow will remain negative in 2025. Including dividend payments, Albemarle will need to fund the shortfall with debt. This will likely raise leverage ratios throughout the year. However, while we see near-term balance sheet weakness, we think the company could generate positive free cash flow by 2026 even if prices remain at current cyclically low levels.

Read more about Albemarle’s financial strength.

Risk and Uncertainty

We assign Albemarle a Very High Uncertainty Rating. The company’s biggest risk is volatile lithium prices. Prices could decline if EV demand grows more slowly than expected or new low-cost supply ramps up quicker than demand. New batteries, such as sodium-ion, could overtake lithium as the preferred energy storage resource.

Lithium production could ramp up more quickly than demand warrants if producers bring too much supply to the market. Further, new lithium production technologies could alter the cost curve in carbonate and hydroxide. Albemarle faces execution risk in ramping up its lithium production, which includes production delays and cost overruns.

Albemarle is also subject to political risk, especially in Chile. In President Gabriel Boric’s announced plan to nationalize lithium, the Chilean government would own a majority stake in all projects. If this occurs, Albemarle could be forced to sell a 50.1% stake to the Chilean government at a price as low as asset book value to extend its lease when it expires in 2043.

Read more about Albemarle’s risk and uncertainty.

ALB Bulls Say

• Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, among the lowest-cost sources of lithium production globally.
• Lithium prices should rebound and remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle.
• Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas.

ALB Bears Say

• Lithium prices could fall and remain lower for longer as new supply growth outpaces demand, weighing on profitability. Albemarle’s plans to increase its lithium production capacity would prove value-destructive in the wake of lower prices.
• Albemarle’s bromine business will decline from weak demand for flame retardants as consumers shift from computers to less bromine-intensive tablets and smartphones.
• Chile’s plan to nationalize lithium could result in Albemarle being forced to sell a majority stake to the government at a price around asset book value, destroying shareholder value.

This article was compiled by Gautami Thombare.