Lithium stocks are on sale! (Or at least it looks that way.)
Over the past year or so, the price of a kilogram of lithium has plummeted by 85%, from roughly $85 in November 2022 to just $13.77 today. Across the board, lithium stocks have followed suit, with most shares in the sector down 40%, 50%, or more over the past year.
Investors in this sector may be confused, and perhaps even a bit frightened, recognizing that many smaller stocks in this sector -- Sigma Lithium, Piedmont Lithium, and Lithium Americas, to name a few -- seem unable to earn a profit with lithium prices so low. These companies may not survive to see an upturn in prices of the metal, essential for manufacturing rechargeable batteries for electric cars. And even if they will survive, how do you invest in a stock with no earnings -- so no price-to-earnings (P/E) ratio, and therefore no good way to value the stock in the first place?
On the other hand, more established lithium companies that have had time to grow and obtain scale of production seem to be doing just fine, reporting high profits even despite low lithium prices. At last report, for example, Livent Corporation(NYSE: LTHM) was earning a strong $375 million on annual sales of $920 million, and selling for just 8 times earnings. Chile's Sociedad Química y Minera de Chile(NYSE: SQM) earned just shy of $3 billion over the last 12 months, and costs an even cheaper 5 times earnings.
And Albemarle Corporation(NYSE: ALB) may be cheapest of all.
An under-the-radar bargain in lithium?
With a $14.7 billion market capitalization and $3.3 billion in trailing 12-month profits, Charlotte, North Carolina-based Albemarle is one of the world's biggest lithium producers -- and arguably one of the cheapest, boasting a P/E ratio of only 4.4 times earnings.
Albemarle even pays its shareholders a dividend -- 1.3%. And with its payout ratio being less than 6%, you might expect this dividend has a lot of room to grow. Indeed, according to historical data from S&P Global Market Intelligence, it has grown already. It's up about 20% over the last five years, from $1.34 per share in 2018 to $1.60 today.
But this is actually our first clue that things may not be as they first appear.
Over these same five years that dividends have inched higher, Albemarle has reported a wildfire 345% increase in "earnings." Yet it's raised its dividend by only 20%? Less than 4% per year? Something doesn't quite add up. It's almost as if Albemarle isn't 100% confident in the quality of its earnings, or their ability to support paying a proportionally higher dividend.
Indeed, the quality of these earnings does seem suspect, the deeper you dig into Albemarle's cash flow statement. As it turns out, while Albemarle has reported $3.3 billion in earnings as calculated according to generally accepted accounting principles (GAAP) over the past 12 months, its actual cash flow during this period was only $2.4 billion. And after deducting capital spending of $1.9 billion, it turns out that free cash flow at the company is a mere $465 million.
Translation: For every $1 in "profit" that Albemarle reports, it generates actual cash profits of only... $0.14.
The trouble with mining stocks
Nor is this an isolated example of reported profit diverging from actual free cash flow at the company in one single year. Indeed, if you go back five years and calculate all the profits Albemarle has reported since 2018 ($4.4 billion), and compare them to the actual cash profits the company has produced (negative $302 billion), the difference is truly astounding.
Admittedly, this is a common problem with resource-extraction companies, whose large capital spending requirements are a perennial cash drain on their businesses. In fact, about five years ago, I wrote a piece in this space explaining that the long-term divergence between reported net income and real free cash flow was the primary reason I would never invest in ExxonMobil. But just because other mining (or more precisely, drilling -- although it's worth pointing out that ExxonMobil is also getting into the lithium mining game) companies suffer from similar problems doesn't mean you should give Albemarle a pass on this.
It simply means you need to be alert to this fact: Mining companies are rarely as profitable as they appear to be on first examination, and their stocks are rarely as cheap as meets the eye.
Caveat investor.
Should you invest $1,000 in Albemarle right now?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
