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

Albemarle is set to release its third-quarter earnings report on Nov. 6. Here’s Morningstar’s take on what to look for in Albemarle’s earnings and stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $225.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

Earnings Release Date

• Wednesday, Nov. 6, after the close of trading

What to Watch for in Albemarle’s Q3 Earnings

• Lithium spot prices fell in the third quarter. Albemarle typically sets its prices with a one-quarter lag to spot prices, so we will look to see the impact here on the company’s realized prices.
• Albemarle is ramping up multiple new lithium production assets. As a result, the company faces temporary higher unit production costs, since it’s still operating the new plants at a lower capacity utilization rate. We will look to hear from management how the production ramp-up is progressing and how this is impacting profits from the cost side.
• Amid cyclically low lithium prices, Albemarle is deferring growth projects and reducing corporate expenses, and the company recently restructured its executive leadership team. We will see if it announces further actions to reduce expenses or capital expenditures to drive positive free cash flow generation in 2025-26.

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 moat rating.

Financial Strength

Albemarle is in good financial health. As of March 31, management reported net debt/adjusted EBITDA was 2.1 times, slightly below management’s long-term target of less than 2.5. The company plans to invest heavily over the next few years to expand its upstream and downstream lithium production volumes. It seeks to grow its lithium refining capacity mostly through the buildout of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher-cost regions like Australia.

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 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 Sokhoeun Noeut.