While the S&P 500 has ripped more than 18% higher year to date, shares of lithium production leader Albemarle (ALB -0.96%), however, have failed to benefit from the generally bullish sentiment pervading the market. Since the start of 2024, Albemarle stock has plummeted about 37%.
But smart investors know that a stock's sharp decline doesn't automatically mean that it's best for investors to avoid it. In fact, strong sell-offs can provide great buying opportunities for quality stocks. Bearing this in mind, two fool.com contributors examine the bull and bear arguments for Albemarle stock.
This lithium stock is down but it's by no means out
Scott Levine: The slide in Albemarle's stock in 2024 isn't so shocking when you consider the company's precipitous profitability decline from last year. Through the first six months of 2024, Albemarle has posted diluted earnings per share (EPS) of $2.03, representing a far cry from the whopping -- and positive -- diluted EPS of $16.03 during the same period in 2023.
What many investors are not properly recognizing, however, is that the company's financial well-being during this period does not spell doom for the company. In fact, despite the decline in profitability, Albemarle has generated positive operating cash flow through the first six months of 2024: about $461 million. This isn't to say that the company's negative EPS isn't important to note; rather, it provides greater insight into the company's financial health, which isn't as disastrous as some may speculate.
Another encouraging sign for the company with regard to 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 boon in lithium pricing that energized Albemarle in 2023 may be over, but that doesn't mean that the company is no longer a viable opportunity for those seeking lithium exposure with long investing horizons. Electric vehicle (EV) demand is expected to remain strong for the foreseeable future, as is growth in utility-scale energy storage. Lithium prices, like those of any commodity, will rise and fall. And though they may be down now, Albemarle's status as a premier lithium producer with a long operating history suggests that the company is able to weather the current downturn.
There's no shortage of lithium supply in the world
Lee Samaha: There's no debate around what moves Albemarle's earnings; it comes down to the underlying price of lithium. Moreover, there's no doubt that the marginal increase in demand for lithium will come from its use in batteries in EVs.
As such, the stock has been sold off this year in line with a deterioration in the outlook for EV sales and EV battery investment 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 near-term cyclical issue that will dissipate in a lower interest-rate environment, which is usually good for car sales.
The big-picture consideration is that there's no shortage of lithium reserves globally. Moreover, the leading producing countries -- Chile, Australia, Argentina, China, the U.S., and Canada -- are all planning to increase production.For example, Chile is calling for proposals to develop lithium mines, and Argentina is believed to be doubling its production capacity in 2024.Meanwhile, in Europe, Rio Tinto is planning a major lithium mine in Serbia.
Securing lithium supplies and not overrelying on foreign supply are also factors that could lead to a glut in the future. As such, lower lithium prices may not curtail production expansion in the way many expect. While the supply glut thesis is far from certain, and there are significant environmental protests against new mines, the risk of an oversupply of lithium in the future can't be discounted, and that spells risk for Albemarle's growth prospects.
Should you power your portfolio with Albemarle now?
For those looking to mitigate risk, Albemarle stock may be better to watch from the sidelines for now, as there's no certainty the stock will rebound in the near future. For those looking to charge up their holdings with a lithium stalwart -- and who plan on holding on to their investment for the long term -- today may be a great time to pick up shares while their sitting in the discount bin.
