The opportunity to benefit from higher commodity prices following the strong recovery from the COVID-19 crisis and limited supply due to the crisis in Ukraine has pushed valuations higher for most stocks in the basic materials sector so far this year.
Among stocks that have failed to boost growth in the sector, which is up 8.2% so far this year, is Albemarle Corporation (ALB), as it has fallen by 3.5%, likely due to its disappointing growth prospects.
I do not think the market has taken this stock lightly because after analyzing the key growth drivers and factors that could instead be holding back growth, I agree that Albemarle shouldn’t be viewed positively.
Thus, I am bearish on this stock.
Albemarle is a manufacturer of lithium and bromine products in addition to various catalysts for consumer electronics, automotive, and healthcare. The company also supplies the chemical, food & beverage industries, oil & gas wells, and refineries.
Based in Charlotte, North Carolina, Albemarle’s operating activities are located in the United States and overseas.
The Lithium segment accounts for 42% of the company’s total sales, the Bromine segment for 35%, and the Catalyst segment for 23%.
Growth Drivers and Potential Headwinds by Business Segment
Lithium Business Outlook
Having completed certain conversion projects that Albemarle is undertaking at its lithium production facilities in Kemerton, Western Australia, the company believes 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 approximately 75% annual growth.
This growth target was set weeks ago when we knew the Federal Reserve would tighten monetary policy, but not much about its amplitude. This growth target may not be as realistic given the Federal Reserve’s intention to conduct up to six rate hikes this year and another four 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 manufacturers are likely to suffer from a possible cut in government spending on EV purchase incentives to free up resources for other more urgent matters.
Aiming to reduce dependence on Russian gas and other natural resources, the G7 will certainly prioritize other projects such as developing renewable energy sources.
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 Outlook
As a result of executing 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 Albemarle’s production profile, but now the company has to deal with another problem, which, unfortunately, is not small.
The problem is strong inflationary pressures, which the company usually counters with special hedging instruments. However, hedging may not be as effective as desired this time due to strong and persistent triggers.
The Bromine segment will seek to mitigate these headwinds and avoid a deterioration in profitability by also implementing ad hoc cost-cutting initiatives.
Albemarle will also benefit from higher pricing, which the company expects to be able to pass on to many of its customers who are poised to take advantage of strong momentum in their industry. In particular, customers involved in oil & gas exploration and healthcare will benefit from higher 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 elevated over the coming months. Nonetheless, the improvement Albemarle has predicted in adjusted EBITDA growth from Bromine operations for 2022 is a modest 5-10% rise from the prior year.
The likelihood that high input prices will wipe out a significant part of this growth is not small.
Catalyst Business Outlook
It’s already known that higher input costs (since the company estimates them directly) will dampen the growth in adjusted EBITDA that Albemarle expects for Fiscal 2022 from the Catalyst business.
Therefore, in its latest quarterly report, the company revised its expected growth downwards. ALB now expects a 5-15% year-over-year increase in 2022.
Catalyst shipments volume improvement should be supported somewhat by refining markets and travel, but not enough, as pre-pandemic levels are unlikely to be reached before the final 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 mitigate this at least partially with an appropriate strategy.
Overall, growth expectations are not great in this business segment either.
Wall Street’s Take
For the past three months, 15 Wall Street analysts have issued a 12-month price target for ALB. The company has a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell rating.
The average Albemarle Corporation price target is $250.73, implying 10.1% upside potential.
The company is expected to face severe headwinds due to high inflationary pressures and potentially weaker demand for certain products such as consumer electronics and EVs. This will be mainly due to the hawkish stance of the monetary authorities and the reduced fiscal stimulus for the auto industry.
I believe the stock is unlikely to break out of its downtrend anytime soon.
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