Why Is Albemarle Stock Dropping?

It’s been a dreadful year for Albemarle (NYSE:ALB), which is down 13.16% year-to-date. But it’s not entirely clear at first glance why the share price has fallen so dramatically.

Recently, news came out that Australia’s richest woman took a stake in the lithium producer. And that follows news that Albemarle had landed a $110 million contract from the US defense department to expand mining and lithium production.

You’ve also got the secular tailwinds from EV production that should in theory be supporting demand for Albemarle’s lithium. So why has the stock been falling?

Why Is Albemarle Stock Dropping?

The primary reason why Albemarle stock has been dropping is that operating income has tumbled by about 70% from $1.1 billion in Q1 2023 to $373 million in the most recently reported quarter. Gross profit margin was slashed too from 49.6% in the first quarter of the year to 23.6% in Q2 2023. 

To highlight how significant that gross margin reduction is, it’s the lowest one on record in the past 12 quarters by our assessment. The reason for the reduction is that the cost of revenues soared from $1.3 billion in the first quarter this year to $1.8 billion in the second quarter.

In spite of the margin compression, though, Albemarle shareholders have much to be excited about.

Revenue Growth Is Simply Stunning

For a lithium producer, Albemarle is absolutely crushing revenue growth, in a good way. It’s delivering year-over-year growth comparisons that a Silicon Valley start-up would be proud of. For example, the last five quarters have delivered year-over-year revenue growth of 91.2%, 151.9%, 193.1%, 128.8%, and 60.2% respectively.

Albemarle also has a sky high return on invested capital of 24.1%. ROIC is a key metric in assessing how efficiently a company can turn capital into profitable returns, and it suggests management is doing so phenomenally well.

And while operating income is down quarter-over-quarter by quite a large amount, it’s still 3x the EBIT it reported in each quarter in 2021.

Albemarle Dividend Could Grow, A Lot

Albemarle is also producing an abundance of cash flows that more than cover its modest 0.87% dividend.

Indeed, income investors might find it compelling to buy the stock, not because of its current dividend, but for how high it could go in the future. That’s because the company’s payout ratio is just 4.74%, meaning there is tremendous room to increase the dividend in the future without compromising cash flows.

We found the stock to be intriguing because it’s vastly underperformed the S&P 500 this year, and yet the fundamentals are largely in very good standing. That compelled us to examine the cash flows and figure out where fair value lies.

Valuation Is Compelling

Following a calculation of cash flows discounted to the present, we arrived at an intrinsic value for Albemarle of $272 per share, which corresponds to an upside of 46.3%. How likely is the stock to rise to that level?

Apparently analysts agree that it’s very possible because 24 of them have a consensus price target of $265.71 per share.

Either way, value investors have a lot to be excited about, but technical traders won’t be so enthused. That’s because the share price has been on the decline literally for the whole of 2023. 

Great traders like Stan Druckenmiller, who famously generated 30% returns, on average, for 30 years prefer to buy stocks that have compelling fundamentals and great stock charts.

Albemarle currently has sufficiently attractive fundamentals to attract interest but its stock chart needs to take a U-turn to check the technically attractive box too.

The Bottom Line

Why is Albemarle stock falling? The share price has fallen this year as a result of declining operating income and falling revenues quarter-over-quarter. 

Albemarle’s financials overall, though, are highly attractive with an abundance of cash flows, lots of upside potential for dividend investors, and increased tailwinds recently from US Defense Department contracts to new investment from high profile buyers.

As soon as the stock chart turns around, Albemarle will check the two boxes famed investor Stan Druckenmiller likes to see, good financials, and good technicals.

For dip buyers, and value investors, who don’t subscribe to technical theories, now might be as good a time as any to consider dipping a toe in the Albemarle waters. At the very least, you’ll be in good company with Gina Rinehart, Australia’s wealthiest woman, whose firm Hancock Prospecting Pty took a 7.72% stake.

It’s widely assumed that she will push for a board seat and a more active role in how the company is run, which in turn could provide a medium-term boost to ALB share price.

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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.