Is Sociedad Química y Minera a Good Lithium Stock to Invest In?

Headquartered in Chile, Sociedad Química y Minera de Chile S.A. (SQM) produces lithium and its derivatives, iodine, and various specialty plant nutrients. The company’s lithium products have applications in electrochemical materials for batteries that power electric vehicles (EVs). Shares of SQM have gained 65.8% in price over the past year and 22.7% over the past three months, outperforming the benchmark S&P 500 index’s 32.4% and 6.1% returns, respectively.

Lithium prices hit three-year highs on September 13, fueled by rising demand from the EV industry. Analysts predict a global lithium shortage soon, given its limited supply and  rising demand for the metal amid the mass adoption of EVs in major economies. Regarding this, Benchmark Mineral Intelligence Analyst George Miller said, “Things are heating up and there is huge anxiety about where lithium supply is going to come from in the near future.”

Because countries worldwide are investing heavily to phase out fossil-fuel-powered vehicles and replace them with EVs, the demand for lithium is expected to remain strong for the foreseeable future. Consequently, surging lithium prices should boost SQM’s profit margins substantially in the near term.

Here’s what could shape SQM’s performance in the near term:

Impressive Growth Prospects

A $622.65 million consensus revenue estimate in the current quarter (ending September 2021) indicates a 37.5% improvement year-over-year. Analysts expect SQM’s EPS to rise significantly from the same period last year to $0.32 in the current quarter.

The Street expects SQM’s revenues and EPS to rise 28.1% and 122.2%, respectively, year-over-year to $2.33 billion and $1.40in its fiscal year 2021. Also, the company’s revenue is expected to rise 24.4% year-over-year to $2.89 billion in fiscal 2022, while its EPS is expected to increase 49.3% from the same period last year to $2.09 next year. In addition, SQM’s EPS is expected to rise at a 19.1% CAGR over the next five years.

Stretched Valuation

In terms of non-GAAP forward P/E, SQM is currently trading at 39.45, which is 174.3% higher than the 14.38 industry average. In addition, its forward Price/Sales and Price/Cash flow ratios of 6.87 and 25.79, respectively, are significantly higher than the 1.42 and 8.37 industry averages.

The stock’s 19.08 forward EV/EBITDA multiple is 153.5% higher than the 7.53 industry average.

Consensus Rating and Price Target Indicate Potential Downside

Of three Wall Street analysts that rated SQM, one rated it Buy, one rated it Hold, and one rated it Sell. The 12-month median price target of $53.67 indicates a 4.6% potential downside from yesterday’s closing price of $56.26. The price targets range from a low of $45.00 to a high of $70.00.

POWR Ratings Reflect Uncertainty

SQM has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SQM has a C grade  for Quality and Sentiment. The company’s 27.35% gross profit margin is 9.9% lower than the 30.35% industry average, which is  in sync with the Quality grade. Also, while SQM’s financial growth prospects look promising, analysts expect the stock to witness a slight pull back soon. These factors justify its  Sentiment grade.

Of the 94 stocks in the A-rated Chemicals industry, SQM is ranked #72.

In addition to the grades we’ve highlighted, we have rated SQM for Growth, Value, Momentum, and Stability. Get all SQM ratings here.

Bottom Line

SQM is expected to benefit substantially from the industry tailwinds over an extended period. However, despite being a dominant player in this space, the company’s lower-than-industry profit margins are a cause for concern. Moreover, given the immense volatility in the markets, SQM’s stretched valuation makes it susceptible to pullbacks in the near term. Thus, we think investors should wait until the company’s fundamentals improve before investing in the stock.

How Does Sociedad Química y Minera de Chile S.A. (SQM) Stack Up Against its Peers?

While SQM has an overall C Rating, one might want to consider looking at its industry peers, Arkema S.A. (ARKAY), AGC Inc. (ASGLY), and Solvay SA (SOLVY), which have an overall A (Strong Buy) rating.

SQM shares were trading at $54.57 per share on Friday morning, down $1.69 (-3.00%). Year-to-date, SQM has gained 12.00%, versus a 19.00% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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