LTHM - Livent: Lithium Boom Or Bust? Analysts Are Rightfully Bullish

2023-10-23 21:50:38 ET

Summary

• Livent Corporation is seeing a 20% year-to-date stock price decline, despite growth potential in the booming EV and lithium market.
• The company's growth strategy includes capacity expansion and next-gen compounds, aligning with the electrification market's needs.
• While lithium prices have faced pressure, analysts still see potential in LTHM, offering an attractive risk/reward ratio and a potential for substantial returns in the long term.

Introduction

The Livent Corporation ( LTHM ) , one of America's largest lithium producers, is currently down 20% year-to-date. It has lost close to 60% of its value since its peak above $35 last year.

In this article, we'll take a look under the hood and discuss the decline in its stock price at a time when lithium is supposed to do really well. After all, the EV sector is booming, and new applications are expected to accelerate demand for rare earth metals, including lithium.

We'll also discuss the risk/reward as analysts continue to believe that LTHM is poised to double!

Given its financial numbers and longer-term opportunities, I absolutely agree with that.

So, let's dive in!

About The Livent Corporation

The Livent Corporation, originally known as FMC Lithium USA Holding Corp., was established in 2018 as an independent company following a restructuring by the FMC Corporation ( FMC ).

The company, whose roots go back to 1944, is headquartered in Philadelphia, Pennsylvania, and specializes in the production of various lithium compounds, with a focus on high-performance lithium products.

These compounds are essential in applications such as electric vehicle batteries and renewable energy technologies.

As we can see in the overview below, Livent's core products include battery-grade lithium hydroxide, lithium carbonate, butyllithium, and high-purity lithium metal.

Additionally, Livent offers specialty lithium compounds such as lithium phosphate, pharmaceutical-grade lithium carbonate, high-purity lithium chloride, and specialty organics.

In order to grow its business in an industry critical to supplying much-needed materials for the energy transition, the company has a growth strategy built on four pillars, two of which stand out to me.

• Capacity Expansion: Livent is actively expanding its production capabilities, including lithium hydroxide and lithium carbonate facilities in North Carolina and Argentina and the construction of a lithium recycling plant. The company is also contributing its expertise to the Nemaska Lithium project in Canada, further securing its position in the electrification market.

As the overview above shows, Livent has its first customer agreement with Ford for the delivery of up to 13,000 metric tons of lithium hydroxide per year over an 11-year period.

• Next-Generation Compounds: To keep pace with evolving battery technologies, Livent is investing in research and development to create new lithium products. This includes lithium metal powders and printable lithium products, aligning with the changing needs of the industry.

The company also announced a proposal to merge with Allkem, creating a leading global lithium chemicals producer.

The merger offers increased scale, vertical integration, and growth opportunities.

As of 2Q23, key milestones have been achieved, including regulatory notifications and applications and a preliminary S-4 registration statement filed with the SEC.

Livent and Allkem shareholders are expected to vote on the merger in the fourth quarter of 2023.

Almost needless to say, Livent anticipates significant growth in the electric vehicle market, driven by increased consumer awareness, government incentives, and the need for carbon reduction.

Having said that, it's not an undisrupted uptrend for miners.

The Pain Before The Gain

The Wall Street Journal said it best when it wrote an article with the title EVs Are On a Lithium Roller Coaster on October 17.

The article mentioned that one of Livent's peers, Albemarle ( ALB ), recently walked away from a $4.2 billion deal to acquire Australian lithium miner Liontown Resources.

This decision was influenced by several factors, including a declining lithium price, financial concerns, and strategic considerations. The lithium price has plummeted from $66,000 per metric ton in 2022 to around $27,000 by October 2023, impacting revenues of the entire industry.

One big factor is weakening Chinese demand.

China's lithium market is adversely affected by weak consumer and business confidence, as well as an ongoing property crisis.

EV sales growth in China decelerated to 37% in the second quarter, in contrast to the global average of 50%.

Consequently, Chinese lithium carbonate futures have plummeted by approximately 37% since their introduction in July, leading to a substantial 35% discount compared to lithium hydroxide futures in the United States.

After all, Chinese demand accounts for 40% of lithium demand.

Although Western lithium prices are also under pressure, they receive some support from battery metal buyers in countries like South Korea and Japan, who aim to benefit from tax incentives tied to President Joe Biden's climate bill.

Nevertheless, the decline in lithium prices may persist. According to Citigroup, lithium carbonate and hydroxide prices could drop another 15% to 20% in the near term due to weak demand, high inventories, and improved supply.

During its 2Q23 earnings call, Livent commented on these developments, highlighting that lithium prices have stabilized at more sustainable levels after reaching historic highs at the end of 2022.

The floor price is estimated to be above $30 per kilo in China, with the expectation that it will continue at this level through 2024.

While there may be price spikes due to supply and demand factors, underlying market fundamentals remain tight.

As a result, the company reaffirmed its full-year 2023 guidance, projecting revenue in the range of $1.025 to $1.125 billion and adjusted EBITDA in the range of $530 to $600 million.

This guidance implies significant revenue and EBITDA growth compared to 2022, driven by higher volumes and average realized prices despite anticipated higher costs.

On a longer-term basis, the company should continue to benefit from a widening supply gap, especially if rising cyclical demand meets a strong secular bull case.

It also helps that the company has a very healthy balance sheet. Analysts expect the company to lower net debt to $9 million this year, followed by a decline to $54 million in net cash at the end of 2024. This means that the company is expected to end up with more cash than gross debt.

Valuation

As I mentioned in the introduction, LTHM's stock price has come down crashing. However, analysts still believe that the fair value is in the lower-$30s range.

While I wouldn't be surprised if these targets were to come down a bit if the company hints at potentially prolonged weakness in the industry when it reports its earnings on October 31, we're dealing with a very attractive risk/reward.

Looking at the chart below, we see that the company has had a normalized P/E ratio of 46x since it became an independently traded company.

We also see that the company is expected to grow its earnings per share by 14% next year, followed by 3% growth in 2025. Needless to say, these numbers can be much higher if lithium prices rebound. They also can come in lower.

Currently, Livent is trading at less than 9x earnings. Even a return to a 28x multiple in 2025 (incorporating the aforementioned expected growth rates) could result in an annualized return of 77%.

A higher valuation and higher expected growth could significantly improve that potential return.

While I absolutely believe that the stock's fair value is more than 100% above its current stock price, we're dealing with a very tricky situation.

Further cyclical weakness could easily cause this stock to drop another 10% to 20%.

So, whenever we're dealing with high-return, high-risk investments, I make the case that the best way to deal with this valuation is to buy gradually and keep positions small.

If you believe that lithium is right for you, I would start very small and gradually add to the position.

In a scenario where LTHM keeps dropping, investors can average down. If LTHM rallies, investors have a foot in the door.

I believe this is the best way to deal with a very favorable long-term investment opportunity that faces shorter-term cyclical risks.

In light of the risk/reward, I give LTHM a Strong Buy rating.

But then again, if you mainly invest in low-volatility dividend growth stocks or similar, LTHM may not be the right choice for you.

Takeaway

While Livent has faced a turbulent year, with a significant drop in stock price, there's an intriguing upside for investors who can navigate the cyclical risks.

With a focus on lithium, a crucial component in EV batteries and renewable energy tech, Livent's growth strategy, capacity expansion, and commitment to next-gen compounds show promise.

Despite the recent decline in lithium prices, Livent maintains a stable financial position and anticipates long-term growth opportunities.

The stock is trading at an attractive valuation, offering a potentially high return, but it comes with a risk, considering industry uncertainties.

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