Despite what might seem to be strong tailwinds from lithium demand, Albemarle (NYSE:ALB) has slumped by over 27 percent in the last year due to declining prices for the essential metal.
Is Albemarle stock undervalued today, and should investors consider buying Albemarle while it remains sold off?
Where Is Albemarle Trading Today?
At first glance, ALB shares don’t appear to be trading at particularly low valuation multiples, despite the decline they have experienced.
The shares are priced at 43.3 times earnings and 36.6x operating cash flow, both of which are rather high ratios that imply significant forward growth.
Price-to-sales and price-to-book are, however, quite a bit more reasonable at 1.6 and 1.0, respectively.
Another measure of Albemarle’s valuation that could suggest it’s trading on the low end is its dividend yield of 2.4 percent. While not the highest in Albemarle’s history, this yield is well above average and compares to the yield spikes that have been associated with selloffs like the 2008 financial crisis and the 2020-21 era.
Revenue Slashed By 50%
When a company’s top line plunges 50% in a few years, it’s time to take note and worry. That’s exactly what happened at Albemarle with the top line collapsing from $10 billion two years ago to $5 billion over the past year.
The profitability tumbled too, which was a big fracture from a long streak of profitable years. GAAP turned negative last year and losses mounted.
But it wasn’t all doom and gloom, in Q2 revenues dipped 7% year-over-year to $1.3 billion, but management squeezed out a small profit of $22.9 million.
Adjusted earnings landed at $0.11 per share, not a blockbuster figure, but still nearly triple the $0.04 it posted in the same quarter last year.
That progress didn’t happen by accident. Management has been aggressively cutting costs and driving operational efficiencies in an effort to steer the ship back on course. And while the challenges are far from over, these early signs of improvement suggest the turnaround may be gaining traction.
Role of Lithium Pricing in Albemarle’s Numbers
One of the largest contributors to Albemarle’s struggles is the general decline in the price of lithium due to oversupply. While demand for lithium has grown enormously in recent years due to the proliferation of EVs and the need for energy storage, mining capacity has expanded to an extent that it has driven down the metal’s price. This has created a difficult operating environment for Albemarle and has been the main driver of its tumble.
This, of course, opens up the question of if and when lithium prices could recover. After all, demand is still underpinned by massive trends in the global transportation and energy sectors that are unlikely to stop anytime soon. The need for lithium for energy storage has also been added to recently by the rising power demands of data centers, which are increasingly straining existing power generation capacity.
Lithium prices did see some upward movement in July, driven primarily by reductions in Chinese production. However, analysts are unconvinced that this trend will keep going.
For the near future, at least, it appears that overproduction will likely keep lithium prices low and make it difficult for businesses like Albemarle to replicate the performance they were turning in as recently as a few years ago.
Where Do Analysts See Albemarle Going?
Analysts tend to believe that Albemarle is trading below its fair value, but it’s worth noting that the range of analyst price forecasts for the stock is extremely broad.
Price targets range from as low as $50 to as high as $200, with an average of $83.53. At this average point, the stock would generate a 12-month return of over 23 percent from the most recent price of $67.90.
The lack of consensus among analysts, however, may make this average less than reliable. Analysts are also divided when it comes to their ratings for ALB, with six rating it a buy, 15 rating it a hold and three rating it a sell.
Is Albemarle Stock Undervalued?
Although Albemarle shares have sold off and the stock is trading well below analyst price forecasts, the business’s fundamentals and outlook may not support the idea that it’s substantially undervalued.
With revenues and net incomes having both been eroded as lithium prices have fallen, Albemarle doesn’t appear as intrinsically valuable as it did when lithium prices soared in the early 2020s.
Though commodity businesses are almost always cyclical, there also doesn’t seem to be a recovery for lithium immediately on the horizon. Despite its own impressive cost reduction efforts, Albemarle is likely to be operating in a market defined by structural oversupply for the foreseeable future.
This view also lines up with the exodus of institutional investors from Albemarle. Since earlier this year, the amount of institutional buying in ALB has fallen sharply while institutional selling has ramped up. In the last six months, large investors have sold nearly $23 billion worth of ALB while buying only a little over $12 billion.
While Albemarle is a solid business operating in what could still be a promising industry, there’s a great deal of uncertainty around when and to what degree lithium prices will rebound.
As such, Albemarle stock may not be particularly undervalued at current prices. For now, investors may do best to hold Albemarle or watch the business for signs of improvement, but the stock may not be a particularly attractive buy at the moment.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.