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Thursday, May 18, 2017

STOCK PICK: Albemarle Corp. (ALB)


Albemarle Corp. (ALB)

May 18, 2017

COMPANY DESCRIPTION

Albemarle Corp. manufactures specialty chemicals, intermediates and catalysts for agricultural chemicals, electronics, polymers, petroleum refining and pharmaceuticals.

INVESTMENT THESIS

The company is the world’s second largest producer of bromine, a chemical used primarily to prevent electronics from catching fire. Bromine prices have been soft recently as desktops, laptops, and TVs, have lost market share to tablets and smartphones, which use less bromine. In addition, demand for bromine for use as a fluid in oil wells has diminished. However, demand in other areas has increased, particularly water treatment and mercury abatement in coal plants. Despite soft demand for bromine, we expect Albemarle to benefit from its position as a low-cost producer.

Albemarle is also a top manufacturer of catalysts used in oil refining. These chemicals are tailored to particular refineries and need frequent replacement, providing ALB steady cash low.

ALB became the world’s largest lithium producer following the acquisition of Rockwood in January 2015. Albemarle controls more than a third of the lithium carbonate market through its salt brine assets in Chile and a 49% ownership of Talison mine in Australia. The company’s assets in Chile provide some of the lowest cost lithium anywhere.

Although bromine prices have been soft of late, strong lithium battery demand is likely to reverse this trend. We also expect strong cash flows from the Albemarle’s catalyst business.

As electric vehicle use increases, we expect double-digit annual growth for lithium battery demand. We expect Albemarle and its joint venture with Talison to meet a significant portion of this demand.

RECENT DEVELOPMENTS

On May 3, Albemarle reported first-quarter adjusted earnings of $1.05 per share, up from $0.95 in the prior year period. The consensus estimate had called for earnings of $0.96 per share. The positive earnings surprise reflected Strong Lithium & Advanced Materials results. Adjusted EBITDA increased 11% to $211 million as strong growth in lithium and solid bromine outweighed declines in refining catalysts and higher corporate expenses.

Albemarle also reported first-quarter revenue of $722 million, up from $657 million in 1Q16. Revenue gains reflected higher volumes in all three of the company’s segments.

EARNINGS & GROWTH ANALYSIS

In 2017, we expect revenue to increase 7% to approximately $2.9 billion on improvement in the Refining Solutions business. We expect the operating margin to surpass 21% as the company focuses on cost-cutting, benefits from a more favorable product mix and additional capacity. Our 2017 earnings estimate is $4.20 per share, rising to $5.00 in 2018.

RISKS

Declining lithium or bromine prices are risks for Albemarle Corp. If demand for electric vehicles grows less rapidly than anticipated, lithium prices could decline.
In the energy industry, lower refining margins or lower oil industry profits could cause energy companies to postpone buying catalysts used to remove pollutants from fuel oils.

VALUATION

ALB shares are trading at 26.3-times our 2017 EPS estimate. Our revised discounted free cash flow model assumes a weighted average cost of capital of 9% and generates a valuation of $130. Our target price implies a multiple of 32.1 times our 2017 EPS estimate, which we believe is warranted by prospects for accelerated growth. At its current price, our target, if achieved, offers investors the prospect of a 22% return.

Albemarle Corp. (ALB)
Current Price: $110.54
Target Price: $135
Current Valuation: 26.3 times FY17 EPS
Target Valuation: 32.1 times FY17 EPS



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