Lithium stocks are firing on all cylinders, thanks to rising demand for lithium-ion batteries that are used to power electric cars. These rechargeable batteries are used by several auto makers, including Tesla, Inc. (TSLA - Free Report) , General Motors Company (GM - Free Report) , Navistar International Corporation (NAV - Free Report) and Ford Motor Company (F - Free Report) . They also have applications in consumer electronics (including smartphones and tablets), industrial as well as in the aerospace and defense sector.
The market for lithium-ion batteries has a lot of untapped potential. Demand for these batteries are expected to go up with their increasing adoption in consumer electronic products as well as efforts to promote the use of electric cars by several governments to curb pollution.
China is reportedly considering an eventual ban on production and sales of cars that run on diesel or gasoline. The move is part of Beijing’s efforts to reduce carbon emissions and pollution and is also aimed at promoting the development of electric and hybrid vehicles.
The global market for lithium-ion batteries for vehicles is expected to grow to $30.6 billion in 2024 from $7.8 billion in 2015, according to a report by Navigant Research. Navigant envisions the growth in electric vehicle batteries to be fuelled by premium, long-range vehicles and more affordable vehicles with improved driving ranges.
In this write up, we run a comparative analysis on two prominent lithium players – Albemarle Corporation (ALB - Free Report) and FMC Corporation (FMC - Free Report) – to figure out which stock is more attractive.
Albemarle, sporting a Zacks Rank #2 (Buy), is seeing significant momentum in its lithium business and is well placed to leverage strong expected growth in the battery-grade lithium market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The buyout of the lithium assets of Jiangxi Jiangli New Materials Science and Technology Co. Ltd. has allowed Albemarle to supply premium lithium salts to an expanded global customer base and accelerated the company’s ability to meet its goal of capturing 50% of the growth in the lithium industry.
Albemarle is executing a number of projects that are likely to boost its global lithium derivative capacity to 165,000 metric tons by 2021. Albemarle’s Talison joint venture in Australia is expanding lithium concentrate production at its Greenbushes mine.
Moreover, Albemarle, in September, said that it has developed a novel technology that would allow it to increase annual lithium production in Chile on a sustainable basis to as much as 125,000 metric tons of lithium carbonate equivalent without requiring additional brine pumping at its facility in the Salar de Atacama. The move is part of the company’s efforts to beef up efficiencies and sustainability of its Atacama operations.
On the other hand, FMC Corp., a Zacks Rank #3 (Hold), is seeing strong demand in its Lithium unit and is expanding production capacity to meet the growing demand for electric vehicles. The company is expanding its lithium hydroxide production capacity. It is executing this expansion in three phases.
FMC Corp. has executed its Phase I lithium hydroxide expansion on time and budget, achieving 9,000 metric tons of production run rate in September 2017. The Phase 2 expansion is expected to add another 12,000 metric tons of capacity. The company expects its lithium business to deliver strong earnings growth in 2017.
Let's take a closer look at how Albemarle and FMC Corp. are stacked up against each other in terms of certain key metrics.
Albemarle’s shares have gained 63% over a year while FMC Corp. has rallied 70.8% over the same period. While both stocks have outperformed the industry they belong to over the same period, FMC Corp. clearly scores above Albemarle.
Leverage & Liquidity
Albemarle has a lower leverage as evident by its debt to equity ratio of 0.35 compared with FMC Corp.’s debt to equity ratio of 0.70.
However, in terms of liquidity (as determined by the current ratio), FMC Corp. holds an edge over Albemarle. The current ratio for FMC Corp. is 2.19 compared with 2.11 for Albemarle.
Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, Albemarle looks cheaper compared with FMC Corp.
In case of FMC Corp., the trailing 12-months EV/EBITDA ratio is 24.3, which is above its own average of 18.3 in the past one year and also nearly the high level of 24.7 it scaled over that period. On the other hand, Albemarle is cheaper with a trailing 12-month EV/EBITDA ratio of 18.5.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12-months for Albemarle and FMC Corp. is 11.6% and 16.8%, respectively. While both stocks have scored above the industry’s level of 11.2%, FMC Corp. holds an edge here.
In the last one-year period, the dividend yield for Albemarle has been higher than FMC Corp. While Albemarle offered a dividend yield of 0.9%, FMC Corp. had a yield of 0.7%.
Earnings Surprise History
Taking a look at both the companies surprise history, Albemarle has outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive earnings surprise of 4.3%. On the other hand, FMC Corp. has delivered positive earnings surprises in two of the trailing four quarters while missed twice, delivering an average negative earnings surprise of 2.8%.
The expected earnings per share growth rate for Albemarle for the current year currently stands at 24.5% compared with an expected decline of 6% for FMC Corp. Also, Albemarle has an expected long-term earnings growth of 14.8%, higher than FMC Corp.’s 11.3%. As such, Albemarle is a clear winner in terms of earnings growth expectations.
Our comparative analysis shows that FMC Corp. holds an edge over Albemarle in terms of price performance, liquidity and ROE measures. However, when considering leverage, earnings surprise history, valuation, dividend yield and earnings growth projections, Albemarle seems to be the preferred stock. As the scale is tipped in favor of Albemarle, it is clearly a better lithium play compared to FMC Corp.