Albemarle Corp. (ALB) has released its 4Q 2019 results and outlook for 2020. As analysts expected, 2020 guidance forecasts a down year with EPS down 18% to a midpoint of $4.95 per share driven by a 20% decline in Lithium segment EBITDA. Even this came with caveats such as “Expect a stronger second half than the first” in both Lithium and Catalysts. There was also a coronavirus warning: “Minimal financial impact to date, but ultimately will depend on the length and severity of the outbreak.” Rather than get clobbered on a down day for the overall market, Albemarle stock rose 5.6% to $94.31 on the day of the call, or about 19 times earnings.
I last wrote about Albemarle in November in the article “Albemarle Is Making The Right Moves.” At the time, I noted the down year expected in 2020 with a return to positive free cash flow in 2021. I thought that the lackluster 2020 would create buyable dips that would pay off in later years. As such, I rated the stock at Neutral. That was a bad call, as ALB went on to gain over $30, or 48%. At least I didn’t go outright bearish! The stock started on its climb around the time of the company’s Investor Day on 12/12/2019. At that time, Albemarle laid out a 5-year plan in which the Lithium segment grows sales by 12-17% per year and expands EBITDA margins to 40-45% of sales. The other segments expected slower sales growth, with Bromine up about 2% per year and Catalysts up about 4% with no significant margin growth. Opal Investment Research published a nice summary of the Investor Day on this site in early January, allowing readers catch most of the run if they bought on the bullish call.
Given the downturn and uncertainties around 2020, the market was much quicker to price in the 2021-24 growth than I expected. With the big run-up into the latest earnings report, ALB is trading around its historical EV multiple of 12 times 2019 EBITDA. This means that the company is still not cheap based on 2020 and 2021 EBITDA, which are both expected to be under 2019. Despite my being wrong in November, I still think there could be negative surprises over the next year or two that can create buyable dips. Beyond 2021, however, Lithium growth should allow the share price to appreciate even if the EV/EBITDA multiple stays around 12. My price target for 2024, which I develop below, is $140. While I continue to hold the stock and am bullish for the long term, I am leaving my rating at Neutral given the recent run-up and possibility of negative surprises in 2020.
Lithium Demand Growth Story Still Intact
Lithium volumes increased 24% for Albemarle in 4Q 2019 compared to the prior year. For 2020, the company is forecasting slight volume growth. It is lower prices that’s driving the 20% EBITDA decline for 2020. Nevertheless, Albemarle continues to increase its demand forecast for lithium in the later years.
(Source: Investor Day Presentation 12/12/2019)
Albemarle already has the mining and brine capacity to deliver against this demand growth, with the idle Wodgina from the MARBL JV with Mineral Resources available when needed. Conversion capacity projects are set to come on in 2021 at La Negra (lithium carbonate) and Kemerton (lithium hydroxide). After 2021, an expansion at Kemerton can deliver further capacity as needed.
(Source: Investor Day Presentation 12/12/2019)
At the Investor Day, Albemarle predicted Lithium sales growth of 12-17% annually through 2024 with EBITDA margins of 40-45%. In the table below, I show Lithium segment results assuming the low end of 12% growth starting in 2021. I also use a more conservative improvement in EBITDA margin starting at the 2020 company forecast of “low to mid-30’s” (33%) and improving to 37.4% by 2024. The table shows conversion capacity growth starting from a current value of 85 kT, increasing to 125 with the startup of La Negra 3 and 4 in 2021 and Kemerton Stage 1 in 2022. Kemerton Stage 2 is still on hold, but I show it starting in 2024. Sales per ton of capacity is also shown. This is not exactly equal to a price forecast because Lithium segment sales also include 10-15 kT per year of spodumene sold to non-battery applications and not converted to hydroxide or carbonate. Note that the sales per ton of capacity figures stay low through 2024 and are below 2019 levels. As long as Albemarle can sell out its production capacity, pricing improvements are not needed to deliver the EBITDA growth plan.
Despite the growth pause in 2020, Albemarle is on track to build capacity to meet the anticipated resumption of demand growth at least through 2024. With growing Lithium EBITDA and declining capex as expansions wrap up, free cash flow will allow for dividend increases and buybacks especially in 2023 and beyond as I show in the model below.
The Path To $1 Billion Free Cash Flow
I extended the model I used in my November article through 2024 using numbers from the December Investor Day and 2020 guidance from the latest earnings call.
For 2020, I used company guidance from slides 15 and 17 of the 4Q earnings presentation. Lithium EBITDA was projected to be down 20% and Bromine and Catalysts are both flat. With no announcement yet on sales of the PCS and Fine Chemistry businesses, I included them in Other for the full year. The assumption is the sale would close at year-end 2020 at around 9-10 times EBITDA. For 2021 and beyond, the Lithium business grows as shown in the earlier section, with EBITDA up 10% in 2021 and about 17% per year after that. Bromine grows at 2% and Catalysts at 4%. I am assuming half of the $100 million cost-cutting program announced last year is embedded in the EBITDA figures of the individual segments for 2020. The remaining $50 million is broken out separately for 2021 and beyond.
By 2022, Lithium finally exceeds its 2019 peak and really begins to deliver cash flow with the expansion projects at La Negra and Kemerton coming into service. This will help drive Albemarle’s Net Debt/EBITDA ratio to the low end of its target 2.0-2.5 range. It also implies a share price above $100 assuming an EV/EBITDA multiple of 12. If demand growth progresses as planned, the company will have sufficient cash in 2023 to begin significant buybacks, further boosting the share price. By 2024, free cash flow should approach $1 billion per year, although this is based on the fairly low $300 million capex projection from the Analyst Day presentation. If the company does indeed execute the Stage 2 expansion of Kemerton, 2024 free cash flow would be lower but the capex could be supported by trimming buybacks. Even though my projected 2024 EBITDA of $1.33 billion is a bit under the range given by Albemarle, it would still imply a share price of $140 at the 12x EV/EBITDA multiple. That represents about a 10.5% average annual increase in share price from the current level of $94. With Albemarle growing the dividend at 5% per year as shown in the Investor Day presentation, investors would gain an additional 1.5-1.7% yield.
Short- To Mid-Term Outlook
Albemarle has been forecasting a lackluster 2020 for a few months, starting before the breakout of the coronavirus. The 2020 guidance on the 4Q earnings call is not significantly different from what was discussed in the 3Q call or Investor Day presentation. Nevertheless, the company did outline some specific risks in China due to the virus. Most have to do with supply chain disruptions around imports and exports as well as driver shortages. Albemarle could also see a delayed effect as inventory builds up at Chinese auto manufacturers from virus-related work stoppages. For now, the company is expecting these supply chain kinks to be worked out in the second half of 2020.
(Source: Albemarle 4Q 2019 Earnings Presentation)
Beyond 2020, Albemarle is still bullish on Lithium demand growth based on product announcements from automakers, improvements in battery ranges, and falling EV costs.
In December, we also outlined the mini inputs we use to build our Lithium demand forecasts. These inputs include historical and forecasted technology advancements, cost projections, OEM model announcements, and a number of other factors.
We continue to see the advancements of these variables, which further reduce impediments to wide scale consumer adoption; namely range anxiety, infrastructure and cost parity. The global average range of new EV models launch is expected to exceed 200 miles, with some models exceeding 300.
To support mobility there are now almost 1 million public EV charging connections globally, and the number will continue to expand, especially in Europe and China. And cost improvements through technology and scale are also accelerating.
In their most recent surveys, Bloomberg New Energy Finance reported that the average costs for a Lithium ion BEV battery pack was in the range of $150 per kilowatt hour in 2019. The $100 per kilowatt hour milestone is now within reach in the 2022 to 2024 time period, well ahead of estimates just a year or two ago.
(Source: Luke Kissam, CEO – Albemarle 4Q 2019 Earnings Call)
I was not bullish enough on Albemarle in November, as the stock ran up following optimistic 5-year projections at the company’s Investor Day presentation. The degree to which the market has looked through the known short-term 2020 headwinds was surprising. At current levels, however, the stock is back to its long-term average EV/EBITDA multiple around 12. Given the unknowns around coronavirus impacts in China, there still could be negative surprises in 2020 which create a better buying opportunity than we see today. For that reason, I am maintaining my Neutral rating on ALB. As a long-term investor, I will continue to hold the shares with the expectation that they could be worth around $140 in 2024 based on the low end of the company’s Lithium growth projections.
Disclosure: I am/we are long ALB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.