Albemarle Corp. Stock: Bull vs. Bear

While S&P 500 has ripped the lithium production leader’s shares up more than 18% since last year Albemarle (WHITE -2.54%)however, they failed to benefit from the generally upbeat sentiment permeating the market. Since the start of 2024, Albemarle shares are down about 37%.

But smart investors know that a stock’s sharp decline doesn’t automatically mean investors are better off avoiding it. In fact, strong sell-offs can provide excellent buying opportunities for quality stocks. With that in mind, two fool.com contributors examine the bull and make the case for Albemarle stock.

This lithium stock is dwindling, but by no means depleted

Scott Levine: The decline in Albemarle stock in 2024 isn’t all that shocking when you consider the steep drop in the company’s profitability over the past year. For the first six months of 2024, Albemarle posted a diluted earnings per share (EPS) loss of $2.03, representing far from amazing — and positive — Diluted EPS of $16.03 in the same 2023 period.

What many investors fail to properly recognize, however, is that the company’s financial well-being during this period does not spell disaster for the company. In fact, despite the drop in profitability, Albemarle generated positive operating cash flow in the first six months of 2024: about $461 million. This is not to say that the company’s negative EPS is not important to note; rather, it provides better insight into the company’s financial health, which is not as dire as some might speculate.

Another encouraging sign for the company regarding its cash flow is management’s projection that Albemarle will achieve an operating cash flow conversion (defined as operating cash flow divided by adjusted earnings before interest, taxes, depreciation and amortization) of about 50% for 2024. For context, Albemarle’s cash flow conversion was 37% in 2023.

The lithium price run that energized Albemarle in 2023 may be over, but that doesn’t mean the company is no longer a viable opportunity for those seeking lithium exposure with long investment horizons. Demand for electric vehicles (EVs) is expected to remain strong for the foreseeable future, as is the rise of utility-scale energy storage. Lithium prices, like any commodity, will rise and fall. And while it may be falling now, Albemarle’s status as a premier lithium producer with a long operating history suggests the company is capable of weathering the current downturn.

There is no shortage of lithium supply in the world

Lee Samaha: There is no debate as to what drives Albemarle’s earnings; it comes down to the base price of lithium. Moreover, there is little doubt that the marginal growth in lithium demand will come from its use in electric vehicle batteries.

As such, the stock has been sold off this year in line with a deteriorating outlook for electric vehicle sales and investment in electric vehicle batteries and the concomitant decline in the price of lithium. Still, there’s a longer-term concern here, even if you accept that it’s a short-term cyclical problem that will dissipate in a lower-interest-rate environment, which is usually good for car sales.

The general consideration is that there is no shortage of lithium reserves globally. Moreover, the main producing countries — Chile, Australia, Argentina, China, the US and Canada — all plan to increase production. For example, Chile is calling for proposals to develop lithium mines, and Argentina is believed to be doubling down. its production capacity in 2024. Meanwhile, in Europe, Rio Tinto plans a major lithium mine in Serbia.

Securing lithium supply and not relying too heavily on foreign supply are also factors that could lead to future gluts. As such, lower lithium prices may not dampen production expansion in the way many expect. While the oversupply thesis is far from certain and there are significant environmental protests against new mines, the risk of a future lithium supply cannot be ignored, and that carries a risk to Albemarle’s growth prospects.

Should you be fueling your portfolio with Albemarle now?

For those looking to reduce risk, Albemarle stock may be better off watching from the sidelines for now, as there is no certainty that the stock will bounce back in the near future. For those looking to load up their stocks with a lithium stalwart — and who plan to hold on to their investment for the long haul — today may be a great time to pick up stocks while sitting in the discount basket.