When looking for potential investment options, I always consider the company's leadership position within the sector that it operates. Companies that have the top spot in its area of business stand out because they tend to get stronger over time and can usually weather any headwinds that impact the sector.
One name that stands out to me in the materials sector is Albemarle Corp. ALB. The company is the clear leader in its industry and does have catalysts for growth. Albemarle also recently achieved Dividend Aristocrat status, meaning that it has increased its dividend for at least a quarter of a century, an impressive feat considering that it operates in a highly cyclical sector of the economy.
However, these qualities come at a high price.
Business overview and recent earnings highlights
Albemarle is a leading producer of lithium and bromine. The company is the largest producer of lithium in the world and the second-largest producer of bromine. Albemarle has operations in almost 100 countries and is composed of four reportable business segments: Lithium & Advanced Materials, Bromine Specialties, Catalysts and Other. Lithium and bromine account for almost two-thirds of revenue. Albemarle has a market capitalization of $18.3 billion and generates annual revenue in excess of $3 billion.
The company reported fourth-quarter and full-year 2020 results on Feb. 17. For the quarter, revenue declined 11.4% to $879.2 million, but topped Wall Street analysts' estimates by $10.3 million. Adjusted net income of $84.6 million, or $1.17 per share, was down from adjusted net income of $90.4 million, or $1.73 per share, for the fourth quarter of 2019. However, this was 5 cents ahead of expectations.
For the year, revenue fell almost 13% to $3.1 billion. Adjusted net income of $375.8 million, or $4.12 per share, was a severe decline from adjusted net income of $533.2 million, or $6.04 per share, in the prior year.
The Covid-19 pandemic negatively impacted results in most areas as demand was weaker nearly across the board.
Lithium & Advanced Materials sales decrease 13% to $358.6 million as market pricing declined. Lower contract pricing was also an issue due to battery-grade price adjustments in contracts that were made in late 2019. One bright spot was that volumes were strong as customers kept to their contractual agreements.
Sales in Bromine Specialties grew 8.2% to $263.4 million on improved volumes and pricing. Demand for bromine has recovered since the pandemic began. Input costs for this segment were higher due to higher sales volumes.
Catalysts was the weakest segment of the company as sales fell 31% to $195.7 million, mostly due to lower volumes. Lower travel and transportation fuel demand led to a steep decline in Fluid Catalytic Cracking volumes. However, this business did see an improvement sequentially as some travel restrictions have been eased.
The Other segment grew revenues 10.8% to $61.4 million. This segment is composed of the company's Fine Chemistry Services business, which focuses on life sciences products. This business is less cyclical in nature due to the length of its contracts.
Despite a tough year, Albemarle's balance sheet looks quite resilient. The company had at year's end total assets of $10.5 billion, current assets of $2.2 billion and cash and equivalents of $750,000. This compares to total liabilities of $6 billion and current liabilities of $1.8 billion. Total debt was $3.7 billion, but just $804,000 of debt is set to mature within the next year.
Albemarle expects adjusted earnings per share in a range of $3.25 to $3.65 for 2021, which would be a 16.3% decline from the prior year.
Growth prospects
Even with the difficulty the company experienced last year, each of Albemarle's main segments has tailwinds that should be long-term winners for the company.
The popularity and availability of electric vehicles should be a major source of growth for the company in future years. Battery storage should see an incredible surge in demand as electric vehicles are expected to account for 15% of all new car sales by the middle of the current decade. For context, electric vehicles accounted for just 2% of new car sales as recently as 2018. Lithium, therefore, should see a long runway for growth as more batteries for electric vehicles are needed.
To meet this growing demand, Albemarle has been busy investing in its production capabilities. The company expects to complete its operations at two project sites in 2021, he Le Negra project in Chile and the Kemerton industrial site in Australia in 2021. This should allow for an increase in volumes going forward.
The Chile project, in addition to the company's other sites in the country, offer a low-cost source of lithium. This benefits Albemarle when prices for lithium are high while also softening the impact when pricing declines.
For bromine, improving demand in electronics and automotive end markets helped the segment experience growth in the most recent quarter. This trend appears to continue as consumer rebounds from the Covid-19 pandemic.
Catalysts was the weakest component in 2020, but volumes are expected to be flat in the current year. This is a remarkable achievement considered the difficulty that it experienced last year. A further reduction of travel restrictions would go a long way in helping this business. Previously, Catalysts benefited from robust air travel growth. Though it may take time for consumers to feel comfortable with air travel, a recovery from Covid-19 is likely to take place at some point, making it likely that this segment would see gains in its business.
Dividend and valuation analysis
Albemarle announced it was raising its dividend 1.3% for the upcoming April 1 payment, which marks the company's 27th consecutive year of dividend growth. The most recent increase is a far cry from the dividend's compound annual growth rate of 9.2% from 2011 through 2020, but is likely a sensible move on Albemarle's part due to the impact of Covid-19 on the company.
What has impressed me the most about Albemarle's dividend growth history is its length given the extremely unpredictable nature of the company's business. Earnings per share actually declined from 2011 through 2020 and results have varied wildly from year to year over the last decade. Still, the dividend grew at high single-digit rates.
Even more noteworthy is that the earnings payout ratio never got to a point where a dividend cut appeared to be a possibility. The average payout ratio over the last 10 years was just 30%. The payout ratio never rose above 40% outside of 2014, where the ratio reached 65%.
Earnings per share fell 32% in 2020, but the payout ratio was just 37%, showing that Albemarle has proven very successful at managing its dividend. Using the annualized dividend of $1.56 and the midpoint of earnings per share guidance, Albemarle has a projected payout ratio of just 45%. Recall that earnings per share are also expected to decline a mid-double-digit rate in 2021.
While the company's management of its dividend is appealing, its valuation is another story.
Shares currently trade at $158.47, which results in a forward price-earnings ratio of 45.9. For context, shares have an average multiple of 17.1 times earnings since 2011.
The stock's intrinsic value according to GuruFocus is also incredibly rich.
Albemarle has a GF Value of $79.28, resulting in a price-to-GF Value of 2.0. Shares would have to decline 50% to trade at this level. As a result, Albemarle earns a rating of significantly overvalued from GuruFocus.
Final thoughts
Albemarle does have some positives working in its favor. The company is the clear leader in lithium production and the second-largest producer of bromine. Production in Chile is very low cost and the company has additional projects coming on line over the next two years. The expected increase in electric vehicles should be a sizeable boast to demand for lithium as well. Albemarle's dividend track record is notable given the volatility of business results over the years.
That said, shares of the company have railed 143% over the last year and the valuation has skyrocketed to levels usually enjoyed by high-growth names not those struggling to show bottom-line growth over the long haul. Even allowing for additional growth due to its growth prospects, the stock is expensive both using its own historical valuation and the GF Value. Albemarle appears to be a stock that you would love to won at the right price. As much as I like the company, I would consider taking profits at the current price.
Disclosure: The author has no position in any stocks mentioned in this article.
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