Lithium miner Albemarle(NYSE: ALB) has struggled since hitting an all-time high in 2022, with shares down about 64% since. A primary cause of the decline is likely profit-taking after an intense run-up during the pandemic, but slowing adoption of electric vehicles (EVs) and reduced expectations for future EV demand are also significant factors.
Multiple automakers -- including Ford Motor Company(NYSE: F), General Motors(NYSE: GM), Volkswagen(OTC: VWAP.Y), and Jaguar -- have pulled back on plans to electrify their fleets. For Albemarle, which generates 74% of its revenue from the production of lithium compounds used in battery production, this development has turned a long-running tailwind into an unexpected headwind. However, the market is overlooking the company's solid financial performance.
Despite reduced demand, Albemarle remains profitable
While the news and market sentiment are bearish right now, Albemarle has consistently turned a profit and paid a dividend. For 2023, the company reported net income of $1.6 billion, or $13.36 per diluted share. Gross profit declined year over year due to an increase in cost of goods sold. The company reported a $604 million charge due to a reduction in the market price of lithium products. On the positive side, revenue rose by more than $2 billion. Despite slowing demand, Albemarle is growing its top line; any future increases in the market price for lithium products will only boost its margins and profits.
From a cash-flow perspective, the company had net cash outflows for 2023. However, it generated positive free cash flow the prior two years. The lithium specialist announced an updated plan to focus on free cash flow, including reducing capital spending and expense management. Albemarle took these actions in response to market changes in the lithium supply chain.
New ventures coming on line
Despite slowing electric vehicle sales, Albemarle closed deals with major auto manufacturers in the past year, including Ford and BMW, to provide lithium for battery production. The projects run from 2025 through at least 2030.
While lithium products account for 74% of its business, Albemarle has two other revenue streams: specialties, which makes components used in high-voltage cables, airbags, tires, and other products; and the newly formed Ketjen segment. Ketjen produces specialized chemicals that aid in fuel efficiency and pollution reduction, as well as other petroleum refining operations. Both of these other segments have exposure to automobiles of all kinds. While these businesses amount to only about one-quarter of Albemarle's revenue, they provide meaningful diversification from the EV market.
Albemarle stock offers compelling value
With the stock trading at multiyear lows, but the business still earning billions of dollars, Albemarle merits close examination by value-focused investors. Based on 2023 earnings and recent closing prices, shares are trading at a price-to-earnings ratio (P/E) of less than 9. Albemarle currently has a healthy balance sheet, with book value per share of $83 and a price-to-book ratio of 1.37. Taken together, these metrics demonstrate a strong company trading at low prices -- in other words, a textbook value investing opportunity.
Albemarle raised its dividend for the 29th consecutive year in 2023. With dividend coverage of more than 8 times, the dividend is safe (and presumably the strong history of increases is, too). Additionally, the company has shown it's aware of the recent changes in the EV and lithium markets and has already adjusted course to maximize cash flow from its established leadership position.
With such balance sheet strength, new partnerships on the horizon, and responsive management, Albemarle is a solid value at current prices. Electric vehicles are not going away, but neither are internal combustion engines. Albemarle is poised to profit from sales of both, and recent low prices offer a good opportunity to acquire shares.
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Joseph Arroyo has no position in any stocks mentioned. The Motley Fool has positions in and recommends Volkswagen Ag. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
