Albemarle Corporation: more disadvantages than advantages

The possibility of benefiting from the rise in commodity prices following the strong recovery from the COVID-19 crisis and the limited supply due to the crisis in Ukraine has pushed up the valuations of most stocks in the sector basic materials so far this year.

Among the stocks that failed to drive the sector’s growth, up 8.2% year-to-date, was Albemarle Corporation (ALB), as it fell 3.5%, likely due to its disappointing growth outlook.

I don’t think the market took this stock lightly, because after analyzing the main growth drivers and the factors that could rather be holding back growth, I agree that Albemarle should not be viewed positively.

So, I’m bearish on this stock.

Albemarle is a manufacturer of lithium and bromine products as well as various catalysts for consumer electronics, automotive and healthcare. The company also supplies the chemical, food and beverage industries, oil and gas wells and refineries.

Headquartered in Charlotte, North Carolina, Albemarle’s operations are located in the United States and abroad.

The Lithium segment represents 42% of the company’s total sales, the Bromine segment 35% and the Catalyst segment 23%.

Growth drivers and potential headwinds by industry

Lithium Business Outlook

After completing some conversion projects that Albemarle is undertaking at its lithium production facilities in Kemerton, Western Australia, the company estimates that lithium volume growth can reach 20-30% this year.

Albemarle believes this will contribute well to the full year 2022 adjusted EBITDA growth forecast for the lithium segment, with the company targeting annual growth of around 75%.

This growth target was set weeks ago when we knew the Federal Reserve would tighten monetary policy, but not much about the magnitude. This growth target may not be as realistic given the Federal Reserve’s intention to make six rate hikes this year and four more in 2023.

The expected sharp rise in interest rates could lead to an economic slowdown or even a new recession that would affect several sectors, including consumer electronics and the automotive industry.

The electric vehicle (EV) market could also face significant headwinds in the coming months as EV makers stand to suffer from a possible reduction in government spending on EV purchase incentives to freeing up resources for other more pressing matters.

Aiming to reduce dependence on Russian gas and other natural resources, the G7 will certainly prioritize other projects such as the development of renewable energy.

The lithium segment aims to grow revenue and EBITDA by introducing higher prices, but macroeconomic conditions may not allow the strategy to work perfectly this year.

Bromine Business Prospects

Following the execution of bromine growth projects in Arkansas, the company says it will supply the market with higher volumes in 2022. This is certainly a positive addition to the production profile of Albemarle, but the company now has to deal with another problem, which, unfortunately, is not a small one.

The problem lies in strong inflationary pressures, which the company usually combats with special hedging instruments. However, the cover may not be as effective as desired this time around due to strong and persistent triggers.

The Brome segment will seek to mitigate these headwinds and avoid deterioration in profitability by also implementing ad hoc cost reduction initiatives.

Albemarle will also benefit from higher prices, which the company expects to be able to pass on to many of its customers who are ready to take advantage of the strong momentum in their sector. In particular, customers involved in oil and gas exploration and healthcare will benefit from rising fossil fuel prices and the ongoing fight against COVID-19.

All of this may not be enough to offset freight and raw material costs, which are expected to remain high over the coming months. Nonetheless, the improvement Albemarle predicted in bromine operations adjusted EBITDA growth for 2022 is a modest 5-10% increase over the prior year.

The likelihood that high input prices will wipe out a significant portion of this growth is not remote.

Catalyst Business Prospects

We already know that rising input costs (since the company estimates them directly) will dampen the adjusted EBITDA growth that Albemarle expects for the Catalyst business in fiscal 2022.

Thus, in its last quarterly report, the company revised its growth forecasts downwards. ALB now expects a 5-15% year-over-year increase in 2022.

The improvement in catalyst shipment volume should be somewhat supported by refining markets and travel, but not enough, as pre-pandemic levels are unlikely to be reached before the last quarter of 2022.

The Catalyst business will also come under inflationary pressure due to high freight and input costs if the company does not try to at least partially mitigate this with an appropriate strategy.

Overall, growth expectations are also not great in this business segment.

The Taking of Wall Street

Over the past three months, 15 Wall Street analysts have released a 12-month price target for ALB. The company has a moderate buy consensus rating based on nine buys, five takes, and one sell rating.

Albemarle Corporation’s average price target is $250.73, implying 10.1% upside potential.

Conclusion

The company is expected to face severe headwinds from strong inflationary pressures and potentially weaker demand for certain products such as consumer electronics and electric vehicles. This will be mainly attributable to the hawkish stance of the monetary authorities and the reduction of fiscal stimulus measures for the auto industry.

I think the stock is unlikely to exit its downtrend anytime soon.

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