Lithium pure-play Livent Corp. (NYSE: LTHM) climbed to a 10-week high on February 16th following a better-than-expected quarterly report. Since then, broad market weakness has pushed the stock down 15%, creating an attractive entry point for swing traders and long-term investors alike.
Livent is one of several lithium players that benefited from record-high prices last year as electric vehicle (EV) manufacturers ramped production amid limited commodity supplies. Albemarle, Lithium Americas and others have banked solid 2023 gains on fourth quarter earnings.
Lately, however, the group has taken a turn for the worse. Global recession fears and signs of weak consumer demand for EVs combined with improving supply have slashed lithium hydroxide prices.
While this has dented the near-term outlook for lithium battery demand, it hasn’t changed the longer-term thesis of explosive EV growth. With U.S. automakers continuing to shift away from internal combustion engines, electric, hybrid and fuel-cell vehicles are forecast to account for almost 50% of new domestic auto sales by 2030 (they accounted for just 8% of the market in 2022).
And with lithium a key component of EV batteries, the road ahead looks bright for Livent and its peers. General Motors recently announced that it would invest $650 million in Lithium Americas to secure enough lithium to make up to 1 million EVs annually.
This came just six months after GM struck a multiyear agreement with Livent for lithium hydroxide made from lithium mined at the company’s brine operations in South America. The sourcing contracts highlight how vital the chemical compound is to EV production. Similar deals between automakers and lithium producers could follow.
So with the long-term growth story intact and Livent getting support at the 50-day moving average, the dip looks there for the taking.
How Did Livent Perform in Q4?
Livent’s revenue jumped 79% in the fourth quarter of 2022 to $219 million. Adjusted profits increased fivefold to $0.40 per share. The consensus-topping performance was driven by higher lithium prices and strong end-market demand — and would’ve been even better absent increased material costs and supply chain disruption.
At the midpoint, management’s outlook for 2023 implies 29% revenue growth. This would mark a normalization from the 93% top line growth of 2022 when lithium prices spiked to all-time highs. But it also represents solid growth off a much higher base and reflects expectations of higher average realized prices in 2023.
What Are Livent’s Growth Prospects?
Livent’s biggest growth opportunity is battery-grade lithium hydroxide. Lithium-powered EV batteries are expected to be in demand for many years. Government-mandated carbon emission targets and global automakers' transitions to EV production will make Livent a major participant in EV growth.
Much of the focus will be on China because it is the largest EV market in the world. Livent has a lithium hydroxide manufacturing facility in Rugao, China, and a corporate office in Shanghai. The company will also lean heavily on the U.S. market where at least 50 new EV models are expected to be introduced this year.
An underappreciated part of the lithium growth story is the likelihood for automakers to compete on driving range. As companies try to differentiate in a crowded market, ranges could become a key battleground. This would be a major growth catalyst for Livent because longer-range EVs require higher-density batteries, i.e., more lithium.
In anticipation of the growth ahead, Livent is expanding its production capacity, including at its largest plant in North Carolina. Expansion is also underway in Argentina, where production volumes are on track to reach commercial levels in the second half of 2023.
Outside of the core EV battery business, Livent produces non-battery-grade lithium hydroxide used in industrial greases, butyllithium for polymers and pharmaceuticals and lithium metals for aerospace manufacturing.
Are Livent Shares Undervalued?
Based on trailing 12 months' earnings, Livent is trading at 17x. This is roughly on par with the average P/E for the chemicals industry. Although this suggests the stock is fairly valued, Livent has above-average growth prospects compared to most in the industry. S&P 500 names like Dow and Air Products & Chemicals aren’t positioned to deliver anywhere near the multiyear growth that Livent is.
On a forward-looking basis, Livent trades at just 12x earnings. Compare that to the current forward P/E on the S&P 500 of 18x. This means that for one-third the price of the ‘SPY’ ETF, investors can gain exposure to a lithium company with above-market growth prospects.
Wall Street has grown curiously cautious about Livent since its Q4 earnings release, with falling lithium prices the likely reason. Bank of America recently downgraded the stock from Buy to Neutral with a $29 target, making it six straight neutral calls from the sell side.
Yes, Livent’s near-term picture looks bleaker — but the long-range view is as electric as ever.