Albemarle Post Earnings Update

Albemarle Corp. released earnings earlier this week.  And now that the market has had a couple of days to digest the results, we thought we would publish an update on the company.  Here are a few items of interest from the press release:

  • Sales growth of 10% year over year on the back
    • Lithium & Advanced Materials sales grew 36.2%
  • Adjusted EBITDA growth of 15%
    • Lithium & Advanced Materials adjusted EBITDA grew a whopping 60.3%
  • The company completed the $250 million accelerated share repurchase program, retiring approximately 2.3 million shares in the first half of 2017
  • The company reiterated guidance for 2017
  • Management said to expect lithium pricing to be lower in the second half of the year due to product and customer mix

On the surface, this quarter looks great- double digit revenue and EBITDA growth, insane growth in Lithium, and the company returned cash to shareholders.  But if you look at the stock since the earnings release, it’s down almost 10% as of close yesterday!  So what’s going on?  Well, there are a few things at play in our opinion:

  • The stock was priced to perfection.  
  • The market was expecting too much.
  • The company lowered expectations for lithium pricing for the back half of the year, and didn’t raise the outlook for lithium margins, causing the market to reset expectations for the lithium segment from their lofty levels.

Honestly, we could spend hours debating the causes of the drop in the stock, but at the end of the day it doesn’t really matter.  What does matter is the longer-term picture and whether the overall story has changed.  In our opinion, nothing fundamental has changed about Albemarle Corporation.  The longer term lithium story is the same- supply is tight, new entrants are slow to come online, demand growth has room to outperform forecasts, and ALB is in great shape to maintain a dominant position (look back to our original ALB post for our full analysis).

So, if the longer-term story hasn’t changed, then that means any pullback is a buying opportunity.  If you recall, in our original ALB analysis, we presented a sensitivity table showing potential returns on the stock if bought at that date.  Below, we have updated the charts to show the IRR (ignoring dividends) if the stock is bought at these lower levels.  As a reminder, the table shows potential IRRs through 2020 based on management’s target range for revenue growth, and a range of potential EBITDA valuation multiples.

At $110 per share:

up1

At $105 per share:

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At $100 per share

up3

As you can see, a dip in the shares is a godsend- if ALB drops to $100/share, investors could potentially get up to almost 30% returns per year at the high end of the company’s growth targets through 2020.  If management only delivers the bare minimum of their targets, and the EBITDA multiple comes down from current levels, the IRR is still double digits, which is nothing to scoff at in our opinion.

In summary, we believe that Albemarle is a great long-term hold in the lithium space, and we embrace sell offs like the one currently playing out.  However, we get it- In times like these, it’s tough to maintain your composure and stick to your guns.  When it’s a bloodbath, and everyone’s running for the exits it’s hard to be the one going back into the fray.  But most successful investors have built careers out of doing just that.  What we do in these situations is review our research, reassess the situation as we have in this post, and remind ourselves of the facts and the potential returns displayed above that will be available to us if we trust ourselves.  

So, if you trust in your research (and we cannot stress how important it is to do your own research), then you should welcome this selloff, hope you can catch the stock at even these lower prices, and enjoy the above returns!

 

Disclaimer:  All thoughts presented are our own.  These views are not investment advice, and investors should do their own research before entering any position.

Disclosure: We currently hold a small position in ALB.

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