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Beyond Tesla: 2 Lithium Stocks to Buy Now

While the market for Lithium-ion (Li-ion) batteries has a ton of untapped potential, Tesla Inc.’s TSLA decision to build a $5 billion Gigafactory to meet its requirement of lithium-ion battery packs brought glaring focus on the shortage of supply of this emerging energy storage technology.

Li-ion batteries are a type of rechargeable battery in which lithium ions move from the anode to cathode during discharge, and from cathode to anode when charging. They are a popular choice by electric car manufacturers, and are used by General Motors GM, Navistar International NAV, BMW AG BAMXF, Daimler AG DDAIF, and Ford F, among many others. Li-ion batteries are also used in cellphones, laptops, and other electronic devices, as well as in the aerospace and defense sector.

In January 2016, electronics company Panasonic PCRFY agreed to invest up to $1.6 billion in Tesla’s Gigafactory. Kazuhiro Tsuga, President of Panasonic, said that "We are sort of waiting on the demand from Tesla. If Tesla succeeds and the electric vehicle becomes mainstream, the world will be changed and we will have lots of opportunity to grow.”

Initial production at the Gigafactory began at the beginning of this year, and Tesla anticipates annual lithium-ion battery production of the factory to reach around 35 gigawatt-hours, which equals the total global production of 2014.

While Tesla expects Gigafactory to reach full capacity by 2020, the manufacturing plant has experienced some production issues. This past quarter, the company blamed the Gigafactory as the “primary constraint” on its Model 3 production line, and its target of 5,000 Model 3s per week by the end of this year has been pushed back until the end of Q1 2018.

Even though Tesla reiterated that there are “no fundamental problems” with its production methods or supply chains, investors should consider other lithium-related companies that are looking good at the moment.

Top LIthium Picks

One of the world’s leading producers of machinery and chemicals for the agriculture industry, FMC Corp. FMC is quickly expanding its lithium production capacity. Even though FMC’s lithium business only makes up a small percentage of its total revenue and profits, the company owns its lithium source, the Salar del Hombre Muerto in Argentina, and processing and production facilities.

FMC is a #2 (Buy) on the Zacks Rank, and shares have gained over 77% in the past year. In its most recent quarter, the company reported an adjusted bottom line beat, with a miss on the top line, and its Lithium segment grew 110% year-over-year thanks. FMC also raised its full-year 2017 adjusted earnings guidance to be in the range of $2.59 and $2.69 per share.

Additionally, FMC sits in a strong industry overall. Chemical-Diversified is in the top 28% of all industries on the Zacks Industry Rank, and has returned over 27% year-to-date. The company is not cheap; its forward P/E of 37.57 trades well above the industry average and the S&P 500’s average price-to-earnings. But lithium is a growing industry, and FMC’s current value reflects its potential as a major lithium player.

Albemarle Corp. ALB is the world’s largest lithium producer, and Bloomberg estimates its share of the world’s lithium to be about 35%. The U.S.-based company has leading market positions in lithium, bromine, and refining catalysts, and has three independent sources of lithium: Salar de Atacama, Chile; Silver Peak, Nevada; and Talison Lithium joint venture with Tianqi in Western Australia.

ALB is a #2 (Buy) on the Zacks Rank, and the stock has shot up more than 172% in the last 12 months. Albermarle reports its next quarterly earnings on Nov. 8, and anticipates year-over-year top and bottom line growth of 12.7% and 17.7%, respectively. The company has beaten analyst estimates in the last four consecutive quarters, boasting an average earnings surprise of about 7%.

Like FMC, Albemarle is an expensive stock, with a forward P/E of 32.56; its price-to-earnings sits well above the industry average of 17.25. ALB’s price-to-sales (P/S) ratio is 5.58, while its current PEG ratio is 2.2. Albermarle expects long-term EPS growth over the next three to five years of 14.8%.

Bottom Line

As a whole, the lithium industry has blossomed over the last couple of years, and according to Frost & Sullivan, the global market for Li-ion batteries doubled to $22.5 billion in 2016 from $11.7 billion in 2012. Consumer goods and automobile sectors, in large part drove the demand.

And, the share of the automobile sector in the Li-ion battery market grew to 25% in 2016 from 14% in 2012, per the data from Frost & Sullivan. This represents a Compounded Annual Growth Rate (CAGR) of 37%.

As lithium emerges as a vital component in battery supply, in addition in the increasing use of Li-ion batteries in consumer electronic products and efforts to promote the use of electric cars by many governments to curb pollution, the demand for these batteries is expected to rise.

For an in-depth discussion on Li-ion batteries and the rise of electric vehicles, make sure to check out Zacks’ free report “Electric Cars: Which Companies Will Surge?” It profiles EV technology, EV manufacturers, and the future of the electric vehicle industry. Click here to see the free report >>

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Panasonic Corp. (PCRFY): Free Stock Analysis Report
 
Ford Motor Company (F): Free Stock Analysis Report
 
General Motors Company (GM): Free Stock Analysis Report
 
Tesla Inc. (TSLA): Free Stock Analysis Report
 
Daimler AG (DDAIF): Free Stock Analysis Report
 
Bayerische Motoren Werke AG (BAMXF): Free Stock Analysis Report
 
Navistar International Corporation (NAV): Free Stock Analysis Report
 
Albemarle Corporation (ALB): Free Stock Analysis Report
 
FMC Corporation (FMC): Free Stock Analysis Report
 
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