Traders love to follow Skyworks Solutions (NASDAQ:SWKS) for hints on what may happen with Apple (NASDAQ:AAPL) since Skyworks supplies Apple with chips. How about for Albemarle (NYSE:ALB) stock?
Over the last year, lithium-producer ALB stock emerged as something like that to Tesla (NASDAQ:TSLA) even though Tesla isn’t one of its customers. However, Elon Musk’s success has sent demand for lithium-ion batteries through the roof.
Since late November prices for lithium carbonate are up over 50%. Albemarle shares are up nearly 75%.
Albemarle stock closed on Feb. 1 at $166.37 a share. That’s a market capitalization of $17.71 billion on estimated 2020 revenue of $3.24 billion, of which about 12% hit the net income line.
But before you buy, mind the gap.
Lithium Fuels ALB Stock
It’s Albemarle’s lithium that the stock market cares about. The company produces lithium near Silver Peak, Nevada, and hopes to double production there over the next five years.
Albemarle also has concessions in Chile. There, the government is threatening legal action bec ause it has been cagy with its reserve estimates. The fight is really with a Chilean mining company, Sociedad Química y Minera de Chile (NYSE:SQM), and involves the environmental impact of mining.
Chile wants data on Albemarle’s reserves but has passed data to SQM in the past, and not shared it with the U.S. company.
The Chile brouhaha, combined with President Joe Biden’s plans to expand electric vehicle production, have made Albemarle a speculative darling. Investors see a squeeze on lithium prices and want to get in on it.
More Chemicals in the Mix
Albemarle produces more than lithium. It also produces bromine for things like fire extinguishers and plastics, as well as catalysts , mainly for the oil and gas industry. The market for bromine is expected to grow at a steady 5% per year. The catalyst market is growing at a similar rate.
It’s hard to see what the excitement in Albemarle is all about if you only examine its income statement. Revenues had been growing at 6% per year through 2019 but should be down for 2020. If Albemarle hits earnings guidance, its total 2020 revenues would be about 15% short of where they were a year earlier.
All the buying action on ALB stock is about the future, and those plans to double production. Albemarle sales of lithium for batteries is estimated at $720 million, meaning it’s less than one-quarter the company’s total turnover.
Mind the Gap
The assumption is that the Biden Administration wants American lithium supplying American batteries for American cars, thus prices should rise. This has some analysts drawing nicely sloped earnings projections well into the future.
There remains a bear case, though. Betting on politicians is a mug’s game. Imports could keep prices down. China currently dominates battery manufacturing. Seizing share for the U.S. won’t be easy.
Analysts seem evenly split on Albemarle stock, with four saying buy, four hold and five saying you should sell. Their average 12-month price target is under $120, almost 28% below where it currently trades.
The Bottom Line
ALB stock is a speculation based on both political and market assumptions.
Even if the company doubles lithium production by 2025, as planned, that unit will still be just half its revenues. It doesn’t have the market to itself, and not all its production is American. Albemarle has operations in Australia in addition to those in Chile.
Another important point is that lithium is not the only material you can make batteries from. Sodium and graphene, the latter derived from carbon, also hold great promise.
That’s why I can’t recommend the stock. Batteries will change a lot over the next five years, and Albemarle won’t be the only winner.
At the time of publication, Dana Blankenhorn directly owned shares in AAPL.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
