Albemarle (ALB) has plunged 30% this year and has thus underperformed the market by a wide margin, as the S&P has remained essentially flat during this period. As such a pronounced divergence sometimes results in great investing opportunities, the big question is whether Albemarle has become a bargain.

Business overview

Albemarle is headquartered in the U.S. but serves approximately 2,500 customers in about 100 countries. It is a specialty chemicals company, with leading positions in lithium, bromine and refining catalysts. Lithium has become interesting from an investing point of view in recent years thanks to the exciting growth prospects in electronic devices and particularly the electric vehicles, which require 5,000 to 10,000 times as much lithium as mobile phones. Given these growth prospects, investors should review the potential of lithium stocks.

Albemarle operates in three segments: lithium, bromine specialties and catalysts. In the first nine months of the year, these segments have generated 38%, 29% and 33% of the total revenues and 48%, 27% and 25% of the total EBITDA, respectively.

In the most recent quarter, Albemarle grew its revenues by 3%, its EBITDA by 18% and its earnings per share by 13% over last year. The performance was driven by higher earnings in bromine specialties and catalysts, as well as higher lithium prices, which offset the reduced lithium volumes that resulted from unexpected shutdowns at three manufacturing sites. It was the 11^th consecutive quarter of revenue growth over last year and the 8^th consecutive quarter of double-digit EBITDA growth over last year. In addition, the three manufacturing sites of lithium have all returned to normal operation.

Growth

Albemarle has a volatile performance record. While it has been profitable every single year in the last decade, its earnings have fluctuated widely due to their strong dependence on the underlying business conditions, which are beyond the control of the company. Albemarle has customers in energy storage, the refining industry, consumer electronics, construction, and the automotive industry so it is greatly affected by the prevailing conditions in these sectors.

On the other hand, the company does its best to develop customized solutions for its large customers and thus builds long-term relationships with them. In addition, it is ideally positioned to benefit from the growing demand of lithium, which results from the increased use of phones and electric vehicles. As the latter are still in the early phases of a multi-year growth trajectory, the growth prospects for Albemarle are exciting.

The company is expected to grow its earnings per share by 20%, from $4.59 last year to $5.52 this year. It is also expected by analysts to grow its earnings per share by an additional 12% next year, to $6.18. Moreover, Albemarle has exceeded the analysts’ earnings-per-share estimates for 15 consecutive quarters. Given the strong momentum of the company for so many quarters in a row and the favorable business conditions, it is reasonable to expect it to at least meet the analysts’ consensus.

Dividend

Albemarle has raised its dividend for 23 consecutive years. This is a remarkable growth streak, particularly given the cyclical nature of its business. The vast majority of the companies that belong to the materials sector are severely hurt during recessions and downturns in their businesses. As a result, they do not have meaningful dividend growth streaks. The record of Albemarle shows that the company has a more resilient business model than most of the stocks of this sector. On the other hand, as its current dividend yield is only 1.5%, investors should not purchase the stock based on its dividend.

Valuation

Given this year’s expected earnings per share of $5.52, Albemarle is currently trading at a price-to-earnings ratio of 16.7. This valuation may seem cheap, given the aforementioned growth prospects of the company and the rich valuation of the broad market. On the other hand, investors should note the volatile performance record of the company due to the cyclical nature of its business. Overall, the stock seems to be fairly valued right now.

Competitive advantage

The main competitive advantage of Albemarle is its expertise in its business and the long-term relationships it has built with its customers. The company can rely on these relationships in order to generate a significant portion of its future revenues. In addition, only a few lithium suppliers can meet the significant growth in demand, as it takes time to take lithium from mines to the market and the production cost is prohibitive for small players.

Final thoughts

Thanks to the exciting growth prospects in the demand for lithium, Albemarle is an interesting stock. Nevertheless, despite its plunge this year, the stock has not reached clearly undervalued territory yet. Due to its volatile performance record and its sensitivity to the underlying global economic growth, the stock has a somewhat risky profile. As a result, the investors who want to gain exposure to the growing demand for lithium should wait for a more opportune entry point.