An Undervalued Name In The Lithium Space

One of the things that I say quite frequently is that if the pricing of something looks to you to be way off, the first thing to do is to check your own assumptions. Logically, it is far more likely that you have missed something than that everybody else has and, even if you are “right” and everyone else is “wrong”, the price won’t reflect that until something happens to make them realize that that is the case. So, this week, when I did a post-earnings check on the fundamental metrics for a stock that has served me well over the last couple of years, Livent Corp. (LTHM), I did a lot of assumption checking. And yet, try as I might, I could see no reason why the stock won’t show significant gains from current levels.

Let’s start with those earnings. For the third straight quarter, LTHM beat the consensus estimate for EPS, and did so on EBITDA that grew 42% from the same quarter a year ago. Obviously, being a commodity miner, their profitability is to some extent dependent on market pricing that is out of their control, but the results show that they are a company that maximizes opportunity, with a management team that executes efficiently.

And yet, despite consistently proving that, LTHM continues to trade at levels that equate to P/Es and other value metrics that are extremely low. The trailing and forward multiples are around 13 and 11, while the PEG ratio, where a number below 1.0 indicates a potentially undervalued stock, is around 0.27. Obviously, there are reasons for that, but I’m not sure the market is reflecting the reality for Livent here.

The main reason is that lithium is expected to fall in price in the rest of the year as Chinese demand slows as a result of slowing growth there overall. That will obviously hurt, but only 30% of Livent’s current contracts are at variable rates, so they have some stability and transparency from the remainder, that have fixed prices. That will soften the impact of short-term market fluctuations and, when you get beyond that, the long-term case for lithium is glaringly obvious.

EVs are winning the battle to be the principle alternative energy vehicles and they use lithium batteries, but the story doesn’t end there. Battery storage is important to renewable energy of all kinds and as the world shifts inexorably towards wind, solar, and other power sources, demand for batteries, and therefore lithium, will increase. Most forecasts have lithium demand more than tripling by 2030 to around 2.5 million metric tonnes from final demand of 800,000 tonnes in 2022 and anything close to that would produce a quite serious deficit in the market, forcing prices significantly higher in the coming years.

This is in some ways a classic case of short-term versus long-term influences, with a bit of headline bias thrown in. In the short-term, the market is assuming that lower prices will hurt Livent and other lithium producers, but the dominance of that narrative is detracting from a couple of things. LTHM is not particularly vulnerable to a drop in prices in the short term, and the longer-term price dynamics look to be extremely bullish. On that basis, a stock that is trading at a PEG of 0.27 is really the value that that seems to represent.

The danger here is that the value is too obvious. I found that when I checked the numbers, I wasted a lot of time trying to convince myself that there was something wrong but, in reality, there is a logical reason why LTHM remains depressed for now, and it is not one that will apply for too long. The simple fact is that Livent is a company that has shown it can profit in differing market conditions and operates in one of the fastest growing markets in the world. Those are good reasons to own the stock, no matter what the current conventional wisdom may say.