LTHM - Livent: Good Opportunity To Pick Up An Attractive Business On The Cheap

2023-11-06 15:44:50 ET

Summary

• We touch upon some of the reasons for Livent Corporation's ongoing weakness.
• Despite the risks, the stock offers good value at current levels with attractive valuations and a strong operating structure.
• The long-term EV story remains intact, and Livent's growing lithium carbonate prowess should hold it in good stead.
• Institutions continue to buy this story, whilst the charts suggest that the selling has been overdone.

Introduction

The stock of Livent Corporation ( LTHM ), an integrated business involved in the sale of lithium products, has been facing a rough ride over the past six months. At a time when the broader markets have eked out mid-single-digit returns, the LTHM stock has collapsed by -36%.

Should you buy into the weakness or avoid the stock? Here’s what we think

What Is Driving The Current Weakness in LTHM?

Sentiment towards Livent's stock has shifted on account of a host of reasons. Firstly, there’s the broad slowdown of the EV space to contend with, and LTHM, which is one of the key suppliers of battery-grade lithium hydroxide ( 51% of LTHM’s group sales) for cathode material production, is likely keenly impacted because of the space in which these materials are typically used.

You could argue that in the current environment, where money is tight, not too many EV buyers will likely have a predilection towards premium performance EV vehicles (the preference will likely be towards mass-market volume models, if at all). These vehicles are typically fuelled by higher-density batteries, whose cathodes (NCA and NCM) have greater nickel content. It is also these types of batteries that place greater emphasis on leveraging the benefits of lithium hydroxide. Recent industry data coming out of Asia (70% of LTHM’s topline comes from that region) shows that sluggish demand for NCM batteries has left a profound mark on lithium hydroxide.

Then, LTHM recently missed topline and bottom line estimates at its Q3 results release, and during the same event, it cut its FY revenue and EBITDA guidance range, by -15% and -9% respectively (versus the previously guided range). The guidance cut was largely driven by delays in the commissioning of 10000MT of their lithium carbonate expansion capacity in Argentina (Phase 1), which was due to come online by this year. It has now been pushed back to 2024.

Risks Are Largely Priced In, LTHM Offers Good Value At Current Levels

Clearly, the lithium space is going through some wobbles (also note that the LIT ETF is down by -23% over the past three months), and LTHM is feeling the reverberations on account of that. Having said that, we do believe a lot of these risks have been priced in, and given the long-term tailwinds, we think LTHM actually offers good value now.

To clarify, note that after the weak guidance provided by LTHM management for FY23, the sell-side community has chosen to spread their horizons and even bring down the FY24 numbers in a significant manner. Basically, over the past month, group revenues for next year have been trimmed by -14%, whilst the bottom line has been brought down by an even larger margin of -18.4%.

Prima facie, given such brutal cuts on the EPS front, one would think that forward P/E valuations (based on the FY24 EPS) would come across as pricey relative to the historical average. But such has been the collapse in the price that valuations look incredibly tasty. For context, at current levels, you could pick up the Livent stock at a forward P/E of only 7x, almost a 50% discount to the 5-year average of 13.6x

The other thing to note is how well LTHM’s low-cost operating structure comes across (LTHM has been able to hone its extraction capabilities for over 25 years now), even though FY25. Before we get to the FY25 estimates, it's important to consider that the lithium supply space is littered with a number of small unintegrated players from China and Africa who struggle with adequate feedstock sourcing and fare poorly on the global cost curve. Consequently, these firms aren’t also well-placed to push the pedal when it comes to expansion projects. When the cycle turns adversely, their cost structure will force them to stop production or go out of business. Whereas integrated entities such as Livent can ride through these adverse cycles and still deliver decent operating leverage.

Investors should also note that LTHM is not overly reliant on spot pricing, and has a healthy chunk of long-term contracts that offer some good stability and visibility. Interestingly enough, management confirmed that some of their old pre-2021 multi-year customer contracts would be coming up for renewal soon, enabling them to lock in a higher price for FY24 and beyond.

All in all, if one takes last year’s revenue and EBITDA figures and then looks at sell-side estimates (see image below) all through FY25, you're essentially looking at a business that is poised to deliver topline CAGR of 20% through FY25, and an even better EBITDA CAGR of 26% during the same period.

For a business that will likely deliver such impressive medium-term operating leverage, it feels rather odd to see it priced at only 5.3x EV/EBITDA, a whopping 80% discount to the long-term average.

It’s also worth remembering that the long-term EV story certainly hasn’t been obliterated, and key suppliers of lithium carbonate such as Livent stand to gain tremendously.

According to McKinsey , the number of EVs that would be produced in 2030, would necessitate demand for 3.06MT of LCE (Lithium Carbonate Equivalent), something which the supply side will be unable to meet (massive shortfall of 48%). You could imagine what this could do for prices. Granted, as things stand, LTHM may only be generating carbonate feedstock for its downstream hydroxide activities, but by 2030, the majority of its carbonate supply (close to 60%) could be sold in the market.

Closing Thoughts- What Do The Charts Say

For much of 2023, investors fishing for suitable rotational opportunities within the broad materials universe are unlikely to have pursued Livent's stock, but now once again that opportunity has opened up. Currently, Livent’s relative strength figure versus the broader materials pack is a good 35% off the mid-point of its long-term range and could benefit from some mean-reversion.

On LTHM's own weekly chart, we can see that things are currently not in a good way, as the stock is amid a steep downtrend since mid-July. However, there’s also reason to believe that the script may well change soon enough. Firstly, the stock is now in the midst of a terrain that had previously worked as a good congestion zone (area highlighted in yellow) during February-July 2021. Secondly, the 14-period RSI indicator is also on the cusp of hitting oversold levels. That's not to suggest that we are bound to see a V-shaped reversal, but we suspect the selling momentum may soon flatten out around current levels, opening up decent opportunities to accumulate the stock.

What also provides further support for the buy case is the fact that the smart money has certainly not bailed on this story. If anything, over the last six months, they have actually boosted their total net shares owned in LTHM by 2%.

To conclude, we think this is a good opportunity to get on board with LTHM. The stock is a BUY.

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