Albemarle Corporation (ALB) has been one of the better-performing stocks in recent months. The stock is up 43% since September 11th, mainly driven by the strong rally in electric vehicles and resulting demand for lithium. In fact, the stock is up 87.3% for the year. But can this continue going into the new year?
ALB is the world’s largest lithium producer. It produces lithium from its salt brine deposits in Chile and the U.S. and its hard rock joint venture mines in Australia. ALB is also a global leader in bromine production, which is used in flame retardants and oil refining catalysts.
But its outlook is predicated on robust lithium demand based on an increased need for electric vehicle batteries. EV stocks have been the big story in the markets in 2020, and the election of Joe Biden should further increase the demand for electric vehicles, batteries, and lithium.
Since it was announced that Joe Biden won the election on November 7th, lithium stocks have been on a tear. The Global X Lithium & Battery Tech ETF (LIT) is up 8.6 %, compared with a return of 2.7% for the S&P 500. Investors believe the electric vehicle market should gain immensely under Biden’s leadership. Even the President-elect’s website states the goal of “more than 500,000 new public charging outlets by 2030.”
Car companies are shifting to electric vehicles. General Motors (GM) has committed $27 billion to EVs through 2025 and expects 40% of its new cars will be battery electric vehicles by the end of 2025. All of this relies on batteries and lithium. Without batteries and lithium, there won’t be a future with electric vehicles.
Lithium, especially, plays an integral part in the EV revolution as it’s the key element in lithium-ion batteries. Some even refer to it as “white gold,” and ALB is currently considered the world’s largest producer of “white gold.” As more auto manufacturers move towards EVs, lithium’s demand will explode and ALB will be a key beneficiary.
This demand is already reflected in its latest financial results. Its stock shot nearly 45% up last month after reporting better than expected results for the third quarter. Its guidance for the fourth quarter and full-year 2020 made investors take notice. Management expects strong demand in its core lithium business due to increased demand for EV batteries.
Sales are expected to grow 3.3% next year, while earnings are expected to grow by 2.8%. The company has long-term debt of $2.9 billion with only $702 million in cash at hand as of the end of the last quarter. ALB does have a current ratio of 1.4, indicating it has enough liquidity on hand to cover short-term obligations. The company is profitable, with a net margin of 11.8%, but has an elevated trailing P/E of 37.5. The company also sports a 1.1% dividend yield.
The stock is rated a “Strong Buy” in our POWR Ratings system with a grade of “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. ALB is also ranked #5 in the Chemicals industry.
The demand for lithium should increase over the coming years, not only from EVs but rechargeable batteries used in mobile phones, laptops, and digital cameras. Due to this demand, earnings are expected to grow an average of 10.6% over the next five years. While I feel the company is worth considering, I think it’s best to buy on large dips.
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ALB shares were unchanged in after-hours trading Monday. Year-to-date, ALB has gained 87.36%, versus a 14.92% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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