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Morningstar | Albemarle Rallies on Raised Guidance; As We Increase Our FVE to $125, Shares Remain Undervalued. See Updated Analyst Note from 08 Aug 2018

Albemarle reported strong second-quarter earnings as increased profits across each segment drove adjusted EBITDA 24% higher year on year to $259 million. In the company's earnings release, management raised full-year guidance and now forecasts an adjusted EBITDA range of $990 million-$1,020 million up from a range of $955 million-$1,005 million. Having updated our model, we raise our fair value estimate to $125 per share from $120 due to our increased near-term profit outlook and time value of money effects. Our narrow moat rating remains intact.

The market reacted favorably to the increased guidance, sending shares up 6.4% to just shy of $99 per share. At current prices, we view Albemarle as undervalued, with shares trading nearly 21% below our fair value estimate. Although oversupply concerns continue to weigh on lithium stocks, we expect contracted lithium prices will remain strong over the next several years.

On the earnings call, management noted that Albemarle's contracted lithium prices increased sequentially during the second quarter of 2018 from the first quarter. Although lithium carbonate spot prices in China have fallen from over $25,000 per metric ton in late 2017 to slightly above $15,000 in early August, we emphasize that the lithium spot price in China applies to very little of the total volumes purchased in China. Albemarle sells all of its lithium on contracted prices and, as such, the company's results are not impacted by Chinese lithium carbonate spot price movements.

Management also noted that Albemarle's capacity expansions are on track. The La Negra II lithium carbonate facility in Chile and the Xinyu II lithium hydroxide facility in China should both be fully ramped up by the end of 2018, with the Kemerton hydroxide facility in Western Australia on track to open in 2021.

Albemarle is well positioned to capture growing lithium demand. We think lithium hydroxide demand will grow faster than lithium carbonate. Electric vehicle battery makers will increasingly use lithium hydroxide over carbonate, as hydroxide increases electric vehicle range. For Albemarle, the Xinyu II and Kemerton facilities should be among of the lowest cost lithium hydroxide facilities globally, as they use Talison spodumene. Talison spodumene has a geological cost advantage because its ore contains a higher grade of lithium. The additional hydroxide capacity should boost Albemarle's profits over the long term.

In bromine, Albemarle has benefited from decreased Chinese production as plants have temporarily shut down due to environmental concerns. While this dynamic will keep adjusted EBITDA margins above 31% through the remainder of 2018 and into 2019, we think most of the capacity will eventually come back online, which will decrease prices and weigh on margins. Over the long term, we expect bromine margins return to the high-20% range, which is where they were as recently as 2016.