Albemarle Corporation (NYSE: ALB) stock spiked higher after the company’s bullish earnings report on February 16. However, the stock has since given up nearly all those gains on news that China’s largest battery maker, CATL is offering discounts to some Chinese automakers. The speculation is that this will lead to a lower price for lithium.
The bearish case is that this will be a long-term drag on ALB stock. Battery makers will need to pay less for lithium in order to stay profitable, and that would affect lithium miners such as Albemarle.
The bullish case is that this is likely just noise that shouldn’t affect the long-term outlook for Albemarle and Sociedad Quimica y Minera de Chile (NYSE: SQM) two of the world’s largest lithium miners. That’s why Albemarle looks like a safe buy for forward-looking investors.
Why This Time is Not Different
Electric vehicles (EVs) are becoming a reality. Whether that reality becomes mainstream in 2025, 2030 or later, it’s an inevitable transition. Many auto manufacturers are now fully committed to EV production. It’s a trend that proves the idiom that history doesn’t repeat itself, but it often rhymes.
Age doesn’t necessarily come with wisdom, but it does come with perspective. In the 1980s, the United States became a nation of small cars. Gone were the days of gas-guzzling trucks and sedans as we entered an era of compact, more fuel-efficient cars.
And the change happened almost overnight. I learned how to drive in a Ford station wagon, but I was tooling around in a Chevrolet Cavalier by the time I had my license. The reason for that trip down memory lane is that the transition to small cars didn’t excite everyone. And small cars were met with similar complaints to the ones you hear today.
But we made the transition then. And unless you’re in the “this time it’s different” crowd, you should bet that we’ll make it through this transition as well. There will be winners and losers (remember the Ford Pinto). But the electric vehicle transition is coming.
And lithium demand is not confined to the EV space. The “electrification of everything” trend is also happening as demand for renewable energy surges. And as it does, the need to find storage for that energy will mean more – and larger – batteries. Which for now means more lithium.
A Low-Risk Way to Gain Exposure
Mining stocks like Albemarle are a low-risk way to play this sector because they will win no matter which EV manufacturer comes out on top. And the fact that it's an American company can't hurt right now. Albemarle received $150 million from the U.S. Department of Energy (DOE) as part of the Infrastructure Act that passed Congress in 2022.
But it does remain a long-term play. Albemarle is projecting full-year revenue and earnings per share that will be above the record highs it hit in 2022. Some of that is due to the company’s profit margin of over 36%. And the stock is currently trading at a P/E ratio of 11x earnings, making it an attractive choice in this volatile market.
Don’t Expect a Smooth Ride
In the last five years, Albermarle stock has rewarded investors with a gain of over 117%. That doesn’t include the company’s dividend, which isn’t going to blow you away. However, it is a stable dividend, and the company is a dividend aristocrat that has increased its dividend for the last 29 consecutive years.
Of course, past results don’t guarantee future performance. But my point is that even in the last five years, ALB stock has been marked by periods of strong gains and sharp selloff's. As the recent price action in the stock shows, I expect more of the same despite the demand for lithium increasing.
Analysts tracked by MarketBeat give ALB stock a Hold rating with a price target of $301.95 - a 17% gain from the current price. However, since Albemarle reported earnings three analysts have boosted their price targets with prices well above the consensus estimate. The highest is from Oppenheimer which has an Outperform rating on the stock with a price target of $498.
