Not that long ago, the rise of battery-powered vehicles was not seen as inevitable. There were other alternative power sources for vehicles such as hydrogen fuel cells being touted, and there was a lot of resistance among consumers to any shift away from the internal combustion engine.
It now looks as if lithium ion batteries are the future, however, and alongside specialists such as Tesla (TSLA), every major automobile manufacturer on the planet is committed to the technology to some extent. The ubiquity of the technology makes it hard to pick a winner among carmakers at this stage but investing in the fuel seems like a no-brainer.
Investing in obvious societal and economic trends such as this is a good idea, but often not as simple as it sounds. Most people are aware, for example, that the legalization of cannabis is a thing, and investing in the field makes sense. The problem is that that is a young business, and at this stage, predicting which companies will come out on top is not much more than a guessing game.
Are you buying the next Facebook (FB) or the next Myspace? The next dotcom bust or the next Amazon (AMZN)?
Finding companies that have demonstrated an ability to make money in a new industry is even more difficult and forget about old-fashioned concerns like a reasonable Price to Earnings (P/E) ratio. One would think that the same would apply when looking at ways to play the global shift towards electric vehicles powered by lithium-ion batteries and until last month that was true.
With every company committed to battery power, the obvious play is to buy stock in a company that supplies the “fuel” for the new power units, lithium. The problem for investors though has been that there was no pure lithium play.
Until very recently, it was just another mineral and represented a small portion of the business for mining companies. Those looking to invest in lithium therefore became subject to price variations in copper and other commodities. Then along came Livent (LTHM).
Actually, Livent was always there, but it was hidden; the IPO last month was a spinoff of the lithium unit of the chemical manufacturing company, FMC (FMC). For investors, that has several advantages over a traditional IPO. First, there is an established performance record for the business, and, more importantly, it means that you are buying stock in a company that has already shown the ability to turn a profit.
Yet when the stock debuted on the Nasdaq last month, it did so at $17, at the bottom end of its expected range, and dropped to $14 over the ensuing two weeks. LTHM was, it seems, mainly a victim of bad timing, launching just as the market went into freefall. It was also in part because of a belief by some that lithium prices are artificially high now and will correct back before long.
On that basis, it could be argued that even at $17, the stock was not cheap, but given the fundamental shift towards lithium ion power, is it necessarily true?
Not according to LTHM CEO Paul Graves, who said on a post-earnings call that it was “…almost impossible…to see a meaningful decrease…” in lithium prices. It should be noted that this is not some upstart company in a business where predictions are based purely on hope and enthusiasm. This is a mature business unit in a mature, if rapidly expanding market. Graves expects demand for lithium to quadruple by 2025, and Livent currently has a 26% share of that market.
The problem for Livent and other suppliers is meeting that demand, not a bad problem to have. They and their competitors are still increasing output, but prices are still rising, and are expected to continue to do so for years to come.
That growth is already being reflected in the company’s numbers, with Year on Year revenue growth of 18.6%, and earnings that increase last quarter by 17.6% on the same basis. In that context, and given the potential of the business, trailing and forward P/Es of around 28 and 17 and a PEG ratio of 0.28.
Lithium-ion battery powered vehicles are here to stay, and lithium demand is soaring as a result. LTHM, as the only pure play lithium stock available, and as a business with existing and rapidly growing profits, looks like the best way to play that trend.
