Top Lithium Producer's Stock Down 40%: What Investors Should Know

Key Points

• Albemarle shares dropped 7% in the two days after its earnings release.
• Lower lithium prices contributed to adjusted EPS falling deeply below expectations.
• Lithium prices are expected to stay low in the foreseeable future.

Albemarle Corporation NYSE: ALB is in the basic materials sector and is the 17th largest company in the U.S. chemical industry.  The company is vastly underperforming its sector in 2024, down 40%. The Materials Select Sector SPDR Fund NYSEARCA: XLB has returned 6%.

It reported Q2 2024 financial results on July 30th, 2024. To better understand the business, let's examine the company’s operating segments and other important information from its annual filing. We'll then review the earnings report and close by giving investors some outlook on the stock and providing information on Wall Street expectations.

Albemarle: The World’s Leader in Lithium Production

Albemarle breaks down its business into three reportable segments: Energy Storage, Specialties, and Ketjen. The energy storage segment is what Albemarle is known for lithium production. Lithium is a key component in electric vehicles and solar panel batteries, and Albemarle is the largest lithium producer in the world. The segment extracts and processes lithium from deposits into various lithium compounds, which customers use to make batteries.

The specialties segment produces various compounds, including flame retardants used in various industries. The Ketjen segment works specifically to create compounds that turn crude oil into petroleum products.

The energy storage segment accounted for 86% of adjusted EBITDA in 2023, specialties 11%, and Ketjen 4%. The company primarily gets lithium through mines in Australia, Chile, Nevada, and North Carolina. It purchases lithium through its various joint ventures and holds mineral rights. It also has rights to undeveloped land in Argentina with access to lithium resources.

Albemarle's customers include automakers like Tesla NASDAQ: TSLA and Ford NYSE: F, as well as battery manufacturers.

Albemarle’s Huge Earnings Miss and Construction Shutdown

Albemarle missed big on adjusted earnings per share, which came in at $0.04, compared to the $0.46 expected. This results in an earnings surprise of -91%. Revenue came in $100 million above expectations; however, it was $1.43 billion, which was a surprise of 7%. Revenue fell 40% from a year ago. The company sees its full-year revenue guidance at a midpoint of $5.85 billion, 2% higher than expected.

The revenue drop was largely due to falling lithium prices, but it was offset by a 37% increase in volume. Indeed, lithium prices have fallen 25% to 40% since the end of 2023.

Albemarle said in the release that further construction of its Kemerton lithium plant in Australia is being halted. As a result, the company had to write off $215 million in value associated with the project, resulting in a non-adjusted loss of $1.96 per share. CEO Kent Masters said in an interview with CNBC that the Kemerton facility would reduce its staff by 40%.

Despite lower lithium prices, Albemarle continues to make significant capital expenditures (CAPEX) and ramp up at certain facilities, including facilities in Chile and China. The firm expects CAPEX to range from $1.7 billion to $1.8 billion in 2024.

Where Do Lithium Prices Go From Here?

It seems Albemarle made a gross misstep in its forecasts on lithium prices. In July, Baird analyst Ben Kallo wrote, “Lithium pricing has remained at or below the bottom end of [Albemarle] guidance.”

This is the culprit for the firm’s write-downs. Their higher expected lithium prices allowed them to place a higher value on the Kemerton plant than what materialized based on actual prices.

The company’s earnings are obviously largely reliant on lithium prices, so let's examine what commodity analysts are expecting. Experts expect that lithium prices in China and East Asia will stay low in 2024 but will recover by about 3% in 2025.

Looking at this region is key, as China accounted for about 61% of electric vehicle sales in 2024. Additionally, automakers in the U.S. are falling short of their EV production targets and reevaluating their overall EV plans.

With this in mind, it’s unlikely Albemarle’s profits will recover much anytime soon. Investors should keep abreast of news about the supply and demand of lithium. Automakers changing their tune and ramping up production again would be a positive for Albemarle, as would announcements from other lithium producers to cut production. These actions would lead to higher lithium prices.

Five Wall Street analysts lowered their price targets for the stock after the earnings release. The average price target of those analysts is now $108, implying an upside of 25%.

Albemarle shares were down 7% over the two days after the release, somewhat influenced by these price target cuts.