The lithium industry is facing unprecedented demand with the rise of EVs (electric vehicles) and renewables. Livent (NYSE:LTHM) is one of the few pure-play lithium producers in the growing lithium industry. The company's nearly singular focus on lithium should be highly advantageous in an increasingly high demand environment. While low lithium prices have negatively impacted produces like Livent over the past few years, this price situation should eventually normalize.
Livent's shares recently plunged as a result of lukewarm Q4 results and a lithium price warning. The company missed analyst revenue expectations of $82 million with a revenue of $78.4 million (which represents a 34.6% Y/Y decrease). The company also missed GAAP EPS expectations by 0.06 with a GAAP EPS of $0.00. Despite these lackluster results, Livent has positioned itself well for growth.
High-Growth Industries Pushing Demand
Lithium demand has skyrocketed over the past few years largely as a result of the EV industry. Tesla (TSLA) is almost single-handedly mainstreaming EVs in an industry dominated by gasoline vehicles. EVs have significantly raised the demand for lithium given lithium's utility in EV batteries. In fact, lithium batteries are one of the most important components of cost-effective EVs.
Livent has positioned itself well in the increasingly high demand lithium industry. As one of the few pure-play lithium companies in the industry, Livent has much to gain from growing lithium demand. The vertically integrated Livent also benefits from operating at low cost mineral sites at Salar del Hombre Muerto in Argentina. In fact, Salar del Hombre Muerto is one of the most important lithium sources in the world.
Salar del Hombre Muerto is one of the largest lithium sites in the world.
Source: Danita Delimont
Livent is highly experienced in producing lithium compounds vital in emerging growth industries like energy storage. The company's battery-grade lithium hydroxide is actually some of the highest quality in the industry. Unsurprisingly, the company expects the energy storage to become increasingly important market for the company moving forward.
Lithium demand grew ~15% Y/Y to over 300,000 LCE tons in 2019. Hydroxide demand was particularly healthy as it increased from 65,000 tons in 2018 to ~100,000 tons in 2019. Demand will likely only accelerate as EVs and energy storage grow in popularity. US EV growth appears to be trending on an exponential path with ~1.2 million EVs on the road in 2019. What's more, Asia is even a higher potential market for EVs and is helping drive lithium demand.
BloombergNEF even predicts that there will be more than 500 million EVs in stock by 2040. Even relatively pessimistic Exxon (XOM) predicts that there will be more than 100 million EVs by the same year. Given how well Tesla has performed in recent quarters, these projections seem increasingly realistic. Such long-term growth is obviously great for Livent.
EV projections indicate that lithium will be in high demand for decades to come.
Source: UEIA, BloombergNEF
The electricity industry may hold similar potential to the EV industry in terms of growing lithium demand. Energy storage is becoming a more viable solution for the utility, commercial, and residential energy solutions. Solar, in particular, holds great promise for energy storage given solar's growing cost-effectiveness and its need for baseload power.
Challenges Ahead
Livent still has to deal with the depressed lithium price situation, which remains the largest near-term challenge for the company. The lithium supply glut is expected to continue throughout 2020 and could hamper many of Livent's projects. In fact, Livent is now planning to slow down capacity expansions as a response.
It makes no sense to extend lithium capacity when revenue may not even cover operational expenses as a result of low prices. However, as large producers like Albemarle (ALB) and Livent pull back on capacity expansions, lithium prices should eventually normalize. Moreover, lithium demand only seems to be ramping up, which should put even more upward pressure on lithium prices.
The coronavirus also adds an element of uncertainty to Livent considering the company's large exposure to the Asian market. In 2018, Asia represented 63.6% of Livent's revenue and will almost certainly remain a large market for the company moving forward. There is still no telling how the coronavirus will play out. The coronavirus could also seriously impact supply chains in China, which puts even more pressure on Livent.
Conclusion
Livent is well-situated to take advantage of growing lithium demand especially as one of the industry's few pure plays. The company is undervalued at its current market capitalization of $1.3 billion and forward P/E ratio 33. Not only does Livent have its undivided attention on lithium, but it also boasts relatively higher margins compared to other major competitors. While Livent is facing many headwinds in the near-term, the company's long-term prospects look bright.
