When it comes to investing in electric vehicle growth, Livent Corp. (NYSE: LTHM) is one of the most promising companies. As EVs go from novelties to mainstream this decade, battery-grade lithium hydroxide is expected to be in high demand.
In recent months, however, the lithium pure play has been powered down by falling lithium prices. From mid-November 2022 to late April 2023, lithium prices plummeted nearly 75% as China demand weakened and increased supply from China and Australia caused inventory buildups. In addition to concerns about a consumer spending slowing, this caused Livent’s market value to be cut in half.
Things have improved dramatically since.
Lithium prices have rebounded 50% from their April 24th lows thanks to renewed optimism around EV battery demand. Two big reasons: 1) new energy vehicles (NEV) sales in China were up 110% year-over-year in April and 2) a recent International Energy Agency (IEA) report forecast that government incentives for consumers and automakers to shift to EVs will put lithium demand 16-times above current levels by 2040.
Along with upbeat earnings reports from Livent, Albemarle and other lithium producers, these headlines have reminded investors of lithium’s longer-term growth story. Already up 17% this month, Livent appears to be on the road to recovery. If Wall Street is right, it is a road with plenty of miles ahead.
How Were Livent’s First Quarter Financials?
Livent’s first quarter earnings per share (EPS) nearly tripled year-over-year to $0.60. Although lithium prices trended lower during the period, they were elevated compared to early 2022. This led to higher realized selling prices across all products, which includes non-battery grade lithium for industrial greases, lithium metals for aircraft manufacturing and butyllithium for polymers and pharmaceutical manufacturing. Thanks to strong customer demand, the company was able to overcome supply chain disruption and increased raw material costs in posting record top and bottom line results.
An important development during the quarter was Livent’s revamped agreement with BMW Group. The companies agreed to increase annual lithium hydroxide deliveries and to extend their contract through 2028. This reflects the lithium producer increasing value to the EV supply chain.
What Is the Growth Outlook for Livent?
Due to the strong quarter, management raised its full-year guidance. It now sees revenue in the $1.025 billion to $1.125 billion range. At the midpoint, this would represent 32% growth, which is solid but marks a significant slowdown from 2022 when revenue almost doubled. Guidance for adjusted EBITDA was also raised and implies 55% growth.
Despite expectations of continued cost inflation in 2023, Livent is banking on higher lithium prices being an offset. Although it has surged in recent weeks, the price of lithium still has a big hole to dig out of to reach the company’s projections. Demand for the main EV battery component is likely to trend higher alongside China’s EV recovery. But it is the supply part of the equation that could limit lithium’s ascent.
A year ago, Goldman Sachs predicted that lithium supply would grow at a 33% annual rate from 2022 to 2025 mainly due to increased production from China, the world’s largest EV market. Long-term EV demand will ultimately absorb any oversupply, but in the near-term, supply will be the key variable to watch.
Lithium prices aside, Livent has another factor that is expected to drive growth. Sales volumes are expected to jump 20% in 2023 due in large part to production expansion. CEO Paul Graves said the company is on pace to add 4,000 in available for sale volumes this year. An additional 10,000 metric tons are expected to come online in 2024.
Does Livent Stock Have More Upside?
A major impetus for Livent’s production ramp is the pace at which U.S. automakers are revving their EV manufacturing. Last year, some thirty new EV models were launched in the U.S., giving consumers more EV choices than ever. This year, approximately 50 new EV models are expected to be rolled out. And with most likely to require lithium-based batteries, BMW probably won’t be the last customer to re-up its contract with Livent.
Wall Street is mostly bullish about this next chapter of the EV battery growth story. Last week, two research firms upgraded Livent to a buy rating. This followed an announcement of the company’s proposed $10.6 billion merger with Australian miner Allkem. As Allkem has lithium and borax mining assets in Australia, Japan, Argentina and Canada, the combination could create a global lithium chemicals powerhouse. If approved by regulators, the increased scale and cost synergies would be substantial.
Since Livent’s Q1 release, five out of six analyst opinions have been bullish. With most yet to weigh in on the potential Allkem merger, more upgrades and price target hikes could be forthcoming. The current $30 consensus target implies another 18% upside from here. But given Livent’s strong Q1 performance, raised guidance and the longer term EV battery opportunity, this seems conservative. An Allkem merger would be icing on the cake.