Up 90% YTD, Albemarle Stock Is Overpriced
After around a 175% rally since the March 23 lows of this year, at the current price of $139 per share we believe Albemarle Stock (NYSE: ALB) has surpassed its near-term potential. Albemarle, a leading global developer, manufacturer, and marketer of highly-engineered specialty chemicals, has seen its stock rally from $51 to $139 off the recent bottom compared to the S&P which moved around 65%. The stock is leading the broader markets by a huge margin while one-fourth of its total growth was in November alone. This rally could be attributed to the Q3 earnings beat and positive news on the efficacy of Pfizer’s Covid-19 vaccine – which has resulted in an inflow of funds toward more traditional industries like manufacturing, chemicals, etc. Further, the stock is up 90% from levels seen in late 2019.
Albemarle’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This makes ALB stock overvalued, as the demand and revenues will likely be lower than last year.
Some of this rise over the last 2 years is justified by the roughly 17% growth seen in Albemarle’s revenues from FY 2017 to FY 2019. However, the net income figure jumped from $99.5 million in 2017 to $604.4 million in 2019. This unusual growth could be attributed to tax charges relating partly to the one-time transition tax on earnings of certain foreign subsidiaries under the Tax Cuts and Jobs Act in 2017.
While the company has seen steady revenue growth over recent years, its Price to sales (P/S) multiple has decreased. We believe the stock has crossed its near-term potential and is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove A 9% Change in Albemarle Stock between 2017 and now? has the underlying numbers.
Albemarle’s P/S multiple has changed from just below 5x in FY 2017 to around 2x in FY 2019. While the company’s P/S is about 4x now, there is a downside when the current P/S is compared to levels seen in the past years – P/S of around 2x at the end of 2019 and just below 3x in late 2018.
MORE FOR YOU
So Where Is The Stock Headed?
Albemarle, a chemical company, is a leading global producer of Lithium, Bromine, and Catalyst solutions. While the company’s stock has seen a meteoric rise over the recent months, there is a mismatch with revenue – cumulative 9 months revenues are down 13% y-o-y and net income has decreased by 31%. On the one hand, the Lithium segment sales have suffered due to pricing pressure in certain markets. Bromine and Catalyst Solutions sales and profitability are down due to reduced demand, travel restrictions, and shutdown driven by the Covid-19 crisis. Overall, Albemarle is expected to report lower 2020 revenues as compared to the previous year. This is likely to serve as a reality check for the investors, negatively impacting its stock price.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
What if you’re looking for a more balanced portfolio instead? Here’s ahigh quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams