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

Albemarle released its third-quarter earnings report on Nov. 5. Here’s Morningstar’s take on Albemarle’s earnings and stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $200.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Albemarle’s Q3 Earnings

Albemarle’s third-quarter adjusted EBITDA was up versus the prior-year quarter as reduced unit production costs more than offset lower lithium prices. Albemarle shares were up Nov. 6 at the time of writing as the market reacted to free cash flow guidance above consensus estimates.

Why it matters: Albemarle’s realized lithium prices reflected multiyear low levels as prices bottomed in the middle of the year. Yet the company’s reduced unit costs drove profit growth. This supports our view that Albemarle’s low-cost lithium production will let the firm survive the pricing downturn.

• Management raised its free cash flow guidance for 2025 as lower unit costs reduced capital expenditures, and working capital management will drive free cash flow to exceed dividends in 2025. This aligns with our view that Albemarle can generate positive free cash flow despite low lithium prices.

The bottom line: We maintain our $200 fair value estimate for narrow-moat Albemarle. Our forecast that profits will bottom in 2025 is largely unchanged. We think Albemarle will be able to reduce its unit production costs from improved capacity utilization and its cost reduction plan.

• We view Albemarle shares as materially undervalued, with the stock trading in 5-star territory at less than half of our fair value estimate. Albemarle is our top pick to play an eventual lithium price recovery, given its low unit production costs that underpin our narrow-moat rating.

Big picture: We forecast 2025 will be the multiyear low for lithium prices as the market is oversupplied. However, in recent months, prices have risen slightly as global demand has increased faster than supply.

• We see demand continuing to rise from global EV sales growth and the buildout of utility-scale energy storage system batteries. Yet, due to low prices, much of the supply growth has been delayed, and some supply has exited the market. This should support higher prices in the coming years.

Fair Value Estimate for Albemarle Stock

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $200 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.

Read more about Albemarle’s fair value estimate.

Economic Moat Rating

We award a narrow economic moat rating to Albemarle for the company’s strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either lower-cost evaporation of brine 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 produce lithium at the lowest cost globally, excluding royalties.

Read more about Albemarle’s economic moat.

Financial Strength

Albemarle’s financial health is strained. As of Sep. 30, management reported that net debt/adjusted EBITDA was 2.1 times, within its long-term target of less than 2.5. We expect adjusted EBITDA will fall in the coming quarters due to low lithium prices. Yet as Albemarle generates positive free cash flow exceeding dividends, we think the company will also pay down debt.

Read more about Albemarle’s financial strength.

Risk and Uncertainty

We assign Albemarle a Very High Uncertainty Rating. The firm’s biggest risk is volatile lithium prices. Prices could decline if demand grows more slowly than expected due to slowing EV sales growth. Also, new batteries, such as sodium-ion, could overtake lithium as the preferred energy storage resource.

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, which are among the lowest-cost sources of lithium production globally.
• Lithium prices will rebound then 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 will fall and remain lower for longer as new supply growth will outpace demand, weighing on profitability. Albemarle’s plans to increase its lithium production capacity will prove value-destructive in the wake of lower prices.
• Albemarle’s weak free cash flow generation will result in the company needing to raise equity in the near future, diluting current shareholders.
• Chile’s plan to nationalize lithium could result in Albemarle being forced to trade a majority stake to the government to renew its lease, destroying shareholder value.

This article was compiled by Frank Lee.