Livent: The Market Likely Overreacted - Contract Execution Remains Excellent

tiero

The Lithium Investment Thesis Is Still Robust

The Livent (NYSE:LTHM) banal rallied impressively by 11% aft its fantabulous FQ4'22 net call, attributed to nan EPS hit and much than decent guardant guidance.

However, nan optimism has unluckily been digested, mostly due to Contemporary Amperex Technology's [CATL] strategical prime successful offering battery discounts to Chinese automakers. In our view, this was highly reminiscent of Tesla's (NASDAQ:TSLA) caller move successful cutting their EV prices.

The strategy worked for nan second successful nan US, pinch nan Model Y sold retired for Q1'23 pinch deliveries extended betwixt April and June 2023, against nan same-month delivery for a Model Y placed successful early December 2022.

With nan lion's marketplace share of 37.1% successful nan world EV artillery marketplace successful 2022, akin to TSLA astatine 65% successful nan US EV market, we could not thief but wonderment if CATL was likewise chasing measurement maturation astatine a clip of reduced discretionary spending.

Now really will this effect LTHM, owed to nan cognition of little lithium prices successful nan short term? We are not concerned really, since nan mining institution has deftly negotiated up to 72% of its 2023 volumes astatine fixed pricing terms, pinch 1 statement already group done 2024.

Moderating Lithium Prices

Trading Economics

We understand nan pessimism from nan moderating lithium prices, pinch nan commodity (lithium carbonate) costing 422.5K Yuan per MT, down by -29.3% compared to 595.4K Yuan per MT astatine its highest successful November 2022. However, we must besides item that existent lithium prices stay immensely elevated by +836.8%, compared to pre-pandemic prices of 45.1K Yuan per MT successful December 2019.

Therefore, pinch complete 20% of its volumes exposed to monthly adjustments based connected spot prices, LTHM whitethorn still use immoderate from nan adaptable pricing structure, pinch minimal effect connected its profitability moving forward.

Notably, nan pandemic rally successful nan commodity prices had allowed nan institution to present a stellar performance successful FY2022, pinch revenues of $813.2M (+93.4% YoY), operating margins of 41.7% (+31.9 percent points YoY), and EPS of $1.40 (+677.7% YoY).

Record-low Lithium Inventories In China

Seeking Alpha

This is besides astir apt why nan LTHM guidance continues to guideline up to +20% YoY maturation successful income measurement and higher realized prices successful 2023, contempt nan higher costs of goods/ operating expenses/export duties. It is importantly aided by nan sustained proviso shortage successful comparison to nan increasing demand, resulting successful record-low lithium inventories successful China. With nan state accounting for 36.7% of its revenues successful FY2022, request from China matters indeed.

We judge that CATL, nan world's largest artillery maker, had nary prime but to trim prices, owed to nan effect of nan Inflation Reduction Act [IRA] requirements, wherever EV batteries person to beryllium manufactured domestically pinch trade-friendly proviso chains. It was evident that CATL had nan mostly of its factories located successful China, pinch nan objection of Germany and Hungary.

CATL antecedently supplied General Motors (NYSE:GM), Volkswagen (OTCPK:VWAGY), BMW (OTCPK:BMWYY), and TSLA arsenic well, pinch things uncertain now owed to nan IRA. Perhaps this was why nan artillery shaper had to divert nan impacted request to nan home market, by offering discounts of up to -7%.

However, we stay optimistic astir lithium prices moving forward, pinch 2 Chinese miners, namely Sinomine Resource Group and Zijin Mining Group, expecting lithium prices to stabilize astatine betwixt 300K and 400K Yuan per MT done 2023.

LTHM besides strategically guides nan description of its yearly accumulation capacity to 45K MT of lithium hydroxide by nan extremity of 2023, increasing tremendously by +50% YoY from FY2022 levels of 30K MT. In nan intermediate term, nan institution besides expects to adhd different 34K MT of output from nan Nemaska Lithium task successful Canada by FY2025, pinch different 10K MT from its recycling works successful Argentina/ Canada by FY2026.

As a result, LTHM whitethorn perchance deed its FY2023 guidance of mid-point revenues astatine $1.05B (+29.1% YoY) and adj. EBITDA astatine $545M (+48.6% YoY), contempt nan tougher YoY comparison.

So, Is LTHM Stock A Buy, Sell, aliases Hold?

LTHM 1Y EV/Revenue and P/E Valuations

S&P Capital IQ

LTHM is presently trading astatine an EV/NTM Revenue of 4.01x and NTM P/E of 12.38x, higher than its 1Y pre-pandemic mean of 2.79x and 11.95x, respectively. Otherwise, it is little than nan 1Y mean of 5.34x and 22.79x, respectively.

Based connected its projected FY2024 EPS of $2.53 and existent P/E valuations, we are looking astatine a mean value target of $31.32. This nears nan statement value target of $32 arsenic well, suggesting an fantabulous 32.5% upside imaginable from existent levels.

LTHM 1Y Stock Price

Trading View

However, we reckon location whitethorn beryllium much charismatic introduction points moving forward, pinch nan banal failing to breach February 2023 guidance levels frankincense far. While it is neither reflective of nan company's execution frankincense acold nor nan commodity's semipermanent demand, nan pessimism attributed to CATL's discounted lithium batteries whitethorn perchance propulsion nan LTHM banal nearer to its January 2023 bottommost of $18.97.

Lithium Demand Through 2030

Statista

Nonetheless, LTHM investors apt request not fret since we judge this headwind is simply temporary, attributed to nan market's overreaction from CATL's value cuts. The world request for nan earthy materials should proceed to turn done 2030 to 2.11M MT, expanding tremendously astatine a CAGR of 18.09%.

Notably, lithium proviso is likewise expanding manus successful hand, pinch world mines expected to nutrient 1.03M MT by 2024, against 2022 levels of 682K MT and 2021 levels of 546K MT.

With EVs comprising up to 73% of lithium request by 2030, it is unsurprising that much and much automakers, specified arsenic GM, TSLA, Ford Motor (NYSE:F), and battery makers alike person decided to shape strategical partnerships pinch various lithium miners.

Therefore, investors whitethorn beryllium good advised to adhd astatine $20 aliases lower, owed to nan improved separator of information to our value target.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

I americium a full-time expert willing successful a wide scope of stocks. With my unsocial insights and knowledge, I dream to supply different investors pinch a contrasting position of my portfolio, fixed my peculiar background.Prior to Seeking Alpha, I worked arsenic a professionally trained designer successful a backstage architecture practice, pinch a attraction connected nationalist and healthcare projects. My qualifications include:- Qualified Person pinch nan Board of Architects, Singapore.- Master's successful Architecture from nan National University of Singapore.- Bachelor successful Arts from nan National University of Singapore.If you person immoderate questions, consciousness free to scope retired to maine via a nonstop connection connected Seeking Alpha aliases time off a remark connected 1 of my articles.