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Albemarle Corporation’s ALB shares have gained 13.7% in the past week, outperforming the Zacks Chemical - Diversified industry’s rise of 3.2%. The rally has been largely driven by the recent reports that a major lithium producer from China is planning to cut production, raising hopes of a rebound in lithium prices, which have been going downhill amid rising supply after peaking in 2022.
Technical indicators show that ALB has been consistently trading below the 200-day simple moving average (SMA) since July 18, 2023. The stock broke out above the 50-day SMA last Wednesday, thanks to the reports that China-based Contemporary Amperex Technology Co., Limited could scale back lithium production due to oversupply concerns, but slipped below that key technical level last Friday.
Albemarle’s Shares Trade Below 50 & 200-Day SMA
ALB is currently trading at a roughly 53.6% discount to its 52-week high of $188.47 reached on Sept. 15, 2023.
Let’s take a look at ALB’s fundamentals to analyze the stock better.
Lithium Project Expansion & Productivity Aid Albemarle
Albemarle is well-placed to gain from long-term growth in the battery-grade lithium market. The market for lithium batteries and energy storage remains strong, especially for electric vehicles (EVs), offering significant opportunities for the company to develop innovative products and expand capacity. Lithium demand is expected to grow on significant global EV penetration. ALB expects lithium demand to grow at a compound annual growth rate (CAGR) of 15-20% from 2024 to 2030.
The company is strategically executing its projects aimed at boosting its global lithium conversion capacity. It remains focused on investing in high-return projects to drive productivity. Healthy customer demand, capacity expansion and plant productivity improvements are supporting its volumes.
ALB saw higher sales volumes in its Energy Storage unit in the second quarter of 2024, driven by the ramp-up of lithium projects, including the La Negra expansion in Chile and the processing plant in Qinzhou, China. Albemarle is currently focusing on the optimization and ramp-up of the Kemerton I lithium hydroxide conversion plant in Australia. The Salar yield improvement project in Chile has also achieved a 50% operating rate. The Meishan lithium conversion facility in China has also delivered its first commercial sales ahead of schedule.
Albemarle is also taking aggressive cost-saving and productivity actions in the wake of tumbling lithium prices. The company delivered more than $150 million in restructuring and productivity benefits in the second quarter and is on track to surpass its initial productivity target for 2024 by roughly 50%. ALB is taking actions to maintain its competitive position, including the initiation of a comprehensive review of cost and operating structure, optimization of the conversion network and reduction of capital expenditure.
Strong Financial Health Supports ALB’s Capital Allocation
Albemarle remains committed to driving shareholder value by leveraging healthy cash flows and strong liquidity. At the end of the second quarter of 2024, ALB had liquidity of around $3.5 billion, including cash and cash equivalents of around $1.8 billion. Its operating cash flow was around $363 million, a nearly five-fold year-over-year increase.
The company remains focused on maintaining its dividend payout. It has raised its quarterly dividend for the 30th straight year. ALB offers a dividend yield of 1.8% at the current stock price. Its payout ratio is 33% (a ratio below 60% is a good indicator that the dividend will be sustainable). Backed by healthy cash flows and sound financial health, the company's dividend is perceived to be safe and reliable.
Soft Lithium Prices & Headwinds in Specialties Ail ALB Stock
Weaker lithium market prices are weighing on the company’s performance. ALB’s revenues tumbled roughly 40% year over year to $1,430.4 million in the second quarter, hurt by lower prices. Sales from its Energy Storage unit fell around 53% due to lower lithium market prices. Lithium prices nosedived more than 80% year over year in 2023, and the weakness continues this year. Prices have declined amid slowing demand growth for EVs, inventory glut and increased supply from China. The uncertain macroeconomic environment and high interest rates have weighed on demand. Weaker lithium prices are likely to continue to hurt the company’s results in the third quarter.
ALB’s Specialties unit is exposed to headwinds from demand and pricing weakness. Sales from the segment fell around 10% year over year in the second quarter. The segment faces demand headwinds in the consumer electronics market. The demand weakness is expected to continue in the third quarter. Albemarle has lowered its adjusted EBITDA outlook for the Specialties unit, factoring in slower-than-expected market recovery and higher logistics costs related to the ongoing conflict in the Middle East. It now sees an adjusted EBITDA of $210-$260 million for the segment.
ALB’s Falling Earnings Estimates Reflect Negative Sentiment
The Zacks Consensus Estimate for 2024 for ALB has been revised downward over the past 60 days. The consensus estimate for the third quarter of 2024 has also been revised lower over the same time frame.
The Zacks Consensus Estimate for 2024 earnings is currently pegged at 70 cents, suggesting a year-over-year decline of 96.9%. Earnings are expected to register a decline of roughly 101.1% in the third quarter.
ALB: An Expensive Stock
ALB is currently trading at a forward 12-month earnings multiple of 36.11X, a roughly 129.8% premium to the peer group average of 15.71X, and considerably higher than its five-year median. The market appears to have priced its shares higher despite the bleak earnings trajectory.
Albemarle Stock Underperforms Industry and S&P 500
ALB’s price performance has been lackluster this year, partly reflecting the significant decline in lithium prices. Its shares have lost 39.5% year to date, underperforming the industry’s 4.7% decline and the S&P 500’s rise of 17.7%. Its peers, Sociedad Quimica y Minera de Chile S.A. SQM, Arcadium Lithium plc ALTM and Rio Tinto Group RIO, have lost 36.5%, 86.4% and 16%, respectively, over the same period.
ALB’s YTD Stock Price Performance
Conclusion: Hold Onto ALB Stock for Now
Albemarle is benefiting from higher lithium volumes on project ramp-ups and actions to boost its global lithium conversion capacity and productivity actions. ALB is well-placed to capitalize on the significant growth opportunity in the battery-grade lithium market underpinned by the global shift toward EVs. However, a significant pullback in lithium prices, softness in the Specialties unit and declining earnings estimates could dampen its prospects. Its stretched valuation also might not offer an attractive entry point at this time. Considering these factors, holding onto this Zacks Rank #3 (Hold) stock will be prudent for investors who already own it.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
In the latest trading session, Albemarle (ALB) closed at $87.44, marking a -1.2% move from the previous day. The stock's change was less than the S&P 500's daily gain of 0.54%. Meanwhile, the Dow experienced a rise of 0.72%, and the technology-dominated Nasdaq saw an increase of 0.65%.
The specialty chemicals company's shares have seen an increase of 11.83% over the last month, surpassing the Basic Materials sector's gain of 2.05% and the S&P 500's gain of 4.86%.
Analysts and investors alike will be keeping a close eye on the performance of Albemarle in its upcoming earnings disclosure. The company is expected to report EPS of -$0.03, down 101.09% from the prior-year quarter. Simultaneously, our latest consensus estimate expects the revenue to be $1.39 billion, showing a 39.92% drop compared to the year-ago quarter.
ALB's full-year Zacks Consensus Estimates are calling for earnings of $0.70 per share and revenue of $5.61 billion. These results would represent year-over-year changes of -96.85% and -41.62%, respectively.
Any recent changes to analyst estimates for Albemarle should also be noted by investors. These revisions help to show the ever-changing nature of near-term business trends. As a result, we can interpret positive estimate revisions as a good sign for the company's business outlook.
Based on our research, we believe these estimate revisions are directly related to near-team stock moves. To utilize this, we have created the Zacks Rank, a proprietary model that integrates these estimate changes and provides a functional rating system.
The Zacks Rank system, which varies between #1 (Strong Buy) and #5 (Strong Sell), carries an impressive track record of exceeding expectations, confirmed by external audits, with stocks at #1 delivering an average annual return of +25% since 1988. Over the past month, the Zacks Consensus EPS estimate has moved 29.26% lower. Right now, Albemarle possesses a Zacks Rank of #3 (Hold).
Looking at its valuation, Albemarle is holding a Forward P/E ratio of 127.34. This signifies a premium in comparison to the average Forward P/E of 16.37 for its industry.
One should further note that ALB currently holds a PEG ratio of 7.96. The PEG ratio is akin to the commonly utilized P/E ratio, but this measure also incorporates the company's anticipated earnings growth rate. ALB's industry had an average PEG ratio of 1.12 as of yesterday's close.
The Chemical - Diversified industry is part of the Basic Materials sector. Currently, this industry holds a Zacks Industry Rank of 212, positioning it in the bottom 17% of all 250+ industries.
The Zacks Industry Rank evaluates the power of our distinct industry groups by determining the average Zacks Rank of the individual stocks forming the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.
Make sure to utilize Zacks.com to follow all of these stock-moving metrics, and more, in the coming trading sessions.
Zacks Investment Research
Albemarle (ALB) closed the latest trading day at $88.50, indicating a -0.9% change from the previous session's end. This change lagged the S&P 500's daily gain of 0.75%. On the other hand, the Dow registered a gain of 0.58%, and the technology-centric Nasdaq increased by 1%.
The specialty chemicals company's shares have seen an increase of 22.58% over the last month, surpassing the Basic Materials sector's gain of 0.53% and the S&P 500's gain of 4.03%.
The investment community will be closely monitoring the performance of Albemarle in its forthcoming earnings report. The company is forecasted to report an EPS of -$0.03, showcasing a 101.09% downward movement from the corresponding quarter of the prior year. Meanwhile, the Zacks Consensus Estimate for revenue is projecting net sales of $1.39 billion, down 39.92% from the year-ago period.
For the full year, the Zacks Consensus Estimates are projecting earnings of $0.70 per share and revenue of $5.61 billion, which would represent changes of -96.85% and -41.62%, respectively, from the prior year.
Additionally, investors should keep an eye on any recent revisions to analyst forecasts for Albemarle. These revisions help to show the ever-changing nature of near-term business trends. With this in mind, we can consider positive estimate revisions a sign of optimism about the company's business outlook.
Empirical research indicates that these revisions in estimates have a direct correlation with impending stock price performance. To exploit this, we've formed the Zacks Rank, a quantitative model that includes these estimate changes and presents a viable rating system.
The Zacks Rank system, running from #1 (Strong Buy) to #5 (Strong Sell), holds an admirable track record of superior performance, independently audited, with #1 stocks contributing an average annual return of +25% since 1988. Over the last 30 days, the Zacks Consensus EPS estimate has moved 29.26% lower. Albemarle is holding a Zacks Rank of #3 (Hold) right now.
Looking at its valuation, Albemarle is holding a Forward P/E ratio of 128.49. This valuation marks a premium compared to its industry's average Forward P/E of 16.26.
Meanwhile, ALB's PEG ratio is currently 8.03. The PEG ratio bears resemblance to the frequently used P/E ratio, but this parameter also includes the company's expected earnings growth trajectory. The Chemical - Diversified was holding an average PEG ratio of 1.12 at yesterday's closing price.
The Chemical - Diversified industry is part of the Basic Materials sector. This group has a Zacks Industry Rank of 213, putting it in the bottom 16% of all 250+ industries.
The Zacks Industry Rank assesses the strength of our separate industry groups by calculating the average Zacks Rank of the individual stocks contained within the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.
Zacks Investment Research
News of the suspension, initially circulated by UBS based on industry sources, was later confirmed by CATL itself. In a statement to Reuters, they acknowledged that "based on recent lithium carbonate market conditions, the company plans to make adjustments on lithium carbonate production in Yichun."
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The move is expected to reduce China's monthly lithium carbonate production by about 8%, equivalent to around 5,000 to 6,000 tons.
The immediate impact was a surge in lithium prices, as lithium carbonate futures on the Guangzhou Futures Exchange jumped 5.5%, reaching 76,700 yuan per ton ($10,700), though still down 27% year-to-date.
The unexpected sentiment shift triggered a supply short squeeze as short-sellers scrambled to cover their positions. Australian lithium producer Pilbara Minerals , owner of the world's largest independent hard-rock lithium operation, surged 16% while U.S.-based Albemarle jumped over 13.5% while remaining down 39% year-to-date.
Albemarle's Short Interest Q4 2023 – Q3 2024, Source: Benzinga Pro
"We see near-term sentiment uplift to lithium prices, helped too by the traditional September-October peak season. These should accelerate the lithium destocking process as well," noted Citi's analyst Jack Shang per AFR.
Tribeca's portfolio manager, Ben Cleary, shared his opinion about the nature of this rally.
"The rally we're seeing today is almost 100 percent short covering. Supply coming out of the market is exactly what the lithium market needs, so there is plenty of room for this rebound to run given how hard the stocks have been hit."
Meanwhile, CLSA's James McIntosh took a more cautious stance.
"Although we are not optimistic about a rebound in lithium prices over the next year, we might be able to believe that there won't be a significant further decline in lithium prices. We have entered the bottom range," he said, pricing the market's floor at 70,000 yuan ($9,800).
UBS projects lithium prices to increase between 11% and 23% for the remainder of the year. However, CATL might resume production if prices stabilize around $10,968 per ton, putting a ceiling on further gains.
Lithium prices have tumbled nearly 90% since its peak in 2022, owing mainly to an oversupply and a slowdown in electric vehicle adoption. As lower prices cut off supply, the market hopes for temporary relief and stabilization.
Also read: Steel Stocks Rebound: JPMorgan Lifts Ratings On Nucor, Steel Dynamics, US Steel
Benzinga Mining is the bridge between mining companies and retail investors. Reach out to licensing@benzinga.com to get started!
Photo via Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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