Lithium supplier Albemarle (ALB -0.96%) recently received a buy rating and a $124 price target from an Argus analyst. The price target implies a 25% upside to the current price.
The value case for Albemarle stock
The price of lithium (a metal whose demand is largely driven by its use in electric vehicle batteries) leads Albemarle's revenue and earnings, which is why its earnings tend to be volatile and oscillate wildly from one period to the next.
Data by YCharts; TTM = trailing 12 months.
Lithium stocks tend to rise or fall based on the price of the commodity, even if it's neutral. Some investors choose well-positioned stocks based on analysts' opinions, while others avoid them to remain impartial. A third group of investors, often aligned with the "deep value" approach, takes a "no view" stance on commodity stocks. They may not have an opinion on lithium prices, but they believe the risk/reward balance favors buying the stock.
This view is logical. If you knew where a commodity's price was headed, there would be no reason to buy stocks; you could instead make a fortune on the options markets trading commodities.
Argus' view that Albemarle's balance sheet is sound would attract this third group of investors. Wall Street expects $2.6 billion in net debt at the end of the year, compared to the company's current market cap of $11.7 billion. Moreover, the company is taking steps including reducing capital spending by 50% in 2025 to about $850 million and cutting costs by $300 million to $400 million a year.
Is Albemarle a buy?
Any positive move in the price of lithium could significantly boost the stock, while the negative impact of a decline in the price of lithium would be more moderate.
Still, with an expected net loss of $1.4 billion and a cash outflow of $1.1 billion, Albemarle will need to do more than reduce costs and capital spending to become profitable. Therefore, the stock is probably best avoided unless you have a favorable view of the price of lithium.
