Recently a Member of Pat McKeough’s Inner Circle asked for his advice on a company that processes an element that is in high demand.
Albemarle is a global specialty chemicals company serving customers in a variety of industries through three main businesses. The primary growth area is its lithium business, with around 48% of overall sales. Revenues jumped in the last quarter, Pat notes, and the company should continue to increase earnings and sales in the near term. Lithium prices are forecast to rise further despite a current production overcapacity, he adds, but oversupply could threaten prices in the long term.
Q: Pat: Hi: What is your opinion of Albemarle (ALB) and lithium in general? Thanks.
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A: ALBEMARLE CORP. (symbol ALB on New York; www.albemarle.com) is a global specialty chemicals company with three main businesses: Lithium and Advanced Materials, Bromine Specialties, and Refining Solutions. The end markets it serves include petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety and custom chemistry services.
The company’s primary growth area is its lithium business. It develops and manufactures a broad range of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and value-added lithium specialties and reagents (used analyze chemicals). Those include butyllithium and lithium aluminum hydride.
The lithium unit (contributing around 48% of overall sales) should prosper with increasing lithium demand. That chemical is needed by the makers of electric car batteries, electric grid and power storage entities, and the makers of smartphones, portable electronic devices and lubricants.
Albemarle’s revenue for the three months ended June 30, 2018, rose 15.8%, to $853.9 million from $737.3 million a year earlier. Stronger lithium sales drove the gains. Earnings, excluding one-time items, increased 18.6% to $150.0 million, or $1.36 a share, from $136.5 million, or $1.13 a share.
As of June 30, 2018, the company held cash of $908.1 million, or $6.25 a share. Its debt of $1.4 billion is a low 13.5% of its market cap.
Growth stocks: Company continues to acquire lithium deposits despite oversupply
Although lithium prices should continue their rise into 2019, they will likely do so at a lower rate than in 2017. Last year, lithium prices rose nearly 30%. For 2018, they are forecast to rise around 9%.
Worldwide lithium production is currently at overcapacity. However, with an eye to the future, Albemarle, along with most other major global producers, continues to acquire lithium deposits, while not developing or mining them.
The company plans to increase its capital spending over the next few years. It will invest $1 billion by 2021—about half of that to be spent this year. In particular, Albemarle is targeting deposits in Chile, Western Australia, China, Argentina and the U.S. The company’s rivals, Sociedad Quimica y Minera de Chile (symbol SQM on New York), FMC Corp. (symbol FMC on New York) and China’s Tianqi Lithium Corp., are also looking to acquire lithium-rich prospects.
The company’s lithium holdings should let it continue to increase its earnings and sales, at least in the near term. Still, longer term, lithium could fall victim to the oversupply issues that often plague commodities when producers rush to catch up with rising orders. Lithium deposits that were previously deemed uneconomical to mine could be accelerated into production and that would bring prices back down.
Albemarle trades at 18.4 times its forecast 2018 earnings of $5.26 a share. The company recently raised its dividend for the 24th consecutive year. With the April 2018 payment, it increased its quarterly dividend by 4.7%, to $0.335 from $0.32. The shares now yield 1.4%.
Inner Circle recommendation: Albemarle Corp. is okay to hold, but only for aggressive investors.
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