LTHM Stock Analysis (Monthly Patron Pick)

Company Profile

We are taking a look into the world of lithium manufacturing and one potential play in Livent Corporation (LTHM).

Livent Corporation manufactures and sells performance lithium compounds primarily used in lithium-based batteries, specialty polymers, and chemical synthesis applications.

The company also has facilities across the world to be able to serve different regions from a supply chain and logistics point of view.

The stock currently trades around $24 as of this post and has a mid cap market cap of around $4 billion.

Macro Environment

Demand

Lithium is a component that has growing demand going forward.

Electric vehicle (EV) demand will continue to drive the lithium market forward: EV penetration will reach 15% in 2025, and we expect to see it rise to around 35% by 2030. Add to that mix growing demand from applications such as energy storage systems (ESS), 5G devices, and Internet of Things (IoT) infrastructure.

When it comes to supply:

“A total of 345,000 tonnes of processed lithium were produced in 2020, dominated by resources from the lithium triangle and Australia. Lithium production must quadruple between 2020 and 2030 to meet growing demand, from 345,000 tonnes in 2020 to 2 million tonnes in 2030.” – Fastmarkets

So there is obvious demand increases that will happen over the next 10 years.

Currently the market demand is outstripping the supply which is great if you are a supplier and it really comes down to matching the supply side to meet that demand otherwise you are essentially leaving money on the table.

Also at some point recycled lithium will start to enter the market which should relieve some of the supply needed globally as batteries/EVs are recycled.

But the question is really how much supply can Livent provide based on their current resources and expansion plans as the business of manufacturing can be high lead times with high capital costs. 

In their Q2 earnings presentation they laid out an expansion as follows:

So realistically the demand of lithium may be exploding, but the company can only increase their capacity so fast. Also in order to increase their capacity they raised money via an equity issuance of around $262 million which in a way dilutes the shares a bit, but it is being used for growth which is always good to see.

Pricing

Looking at the history of lithium carbonate pricing (I know they have Lithium Hydroxide, Butyllithium, High Purity Lithium Metal and Other Specialty Compounds sales as well), it looks like it had an amazing run up til 2018 and then struggled until recently around 2020 and the EV boom we saw in the stock market.

Yes the  chart is in yuan not USD 🙂 this is about $14K in USD

It’s hard to predict what the price of lithium products will be going forward as I feel like a huge part of it will fluctuate based on that supply/demand deficit and if it is met. So for this analysis the assumption will be that pricing remains relatively flat to where it currently is at.

Overall the company is in a space that has raising demand which is great, but the question comes down to is the market cap pricing in this growth already? Let’s take a look at the financials.

Financials

When I look at the current profitability of the company over the last 12 months, they actually have lost around $11 million dollars on revenues of $348 million. 

What is actually a bit concerning is that in 2019 the company was doing a better job at managing their profit margins as they use to have gross margins in the 40% range. It is currently at 14.7% for the TTM (seen below if you can actually read that tiny).

So either from a ease of manufacturing or extracting lithium from their sources has gone down, it is a bit concerning to see that as at the end of the day I like to invest in companies with growing margins and if they are shrinking there should be a reason. Their operating expenses look to have stayed in a similar range over the years, just the cost of revenues has gone up.

Their balance sheet looks fine to me overall as they have enough cash to cover their long term debts, so the company doesn’t look highly leveraged. Part of that is also that they issued equity instead of taking out debt in order to expand capacity.

Guidance

Good news is that the revenue after declining in 2020 seems to be on the upswing going forward as end of 2021 they expect to land around $380 million in revenues. Finbox is showing around an expected 24.5% CAGR for the next 5 years.

Price Target/Valuation

When use some assumptions from fin box on revenue growth it matches pretty closely with the plans around capacity expansion and therefore revenue growth.

Using some aggressive increases in operating margin improvements to get close to results and then some back in 2018 era, I get a combined fair value target of $12.21 (using a DCF and P/S ratio methods).

If I use something like 2022 revenue expectations and use a historical P/S ratio of around 7 I get a price target of $19.87 for the end of 2022.

Overall the price of the stock to me looks like it is mostly pricing in high growth already. That means there may be some downside risk if the company delivers on those expectations already. And if there are delays to the capacity increase that may spell trouble for the stock.

Risks & Ops

I think the biggest risk is around the pricing of the lithium as I believe from a demand side lithium will deliver based on the growth in EV/renewable energy. 

If pricing goes down then the stock will have lower revenues, but at the same time if pricing gets back to 2018 levels then it may be a different story entirely as that could increase revenues significantly and with that type of pricing then the stock would be considered undervalued. 

Unfortunately I don’t base my predictions on pricing as it is less in control of the company and more based on market dynamics and whether or not other players are not stepping in to meet the demand.

That’s why manufacturing companies of basic materials can sometimes be hard to predict as their results can be tied very closely with the price of the basic material they are providing to the market.

Conclusion

Outside of a huge pricing surge related to lithium I think the stock is currently overvalued. While the narrative and macro environment of growth in the lithium markets holds true, the upside of this stock feels more dependent on the price of lithium going higher as the current financials and pricing dynamics don’t show the company being super profitable for the time being.