Electric Vehicle Sales Outlook Down, Time To Sell Livent

Summary

• Livent has rallied despite fundamental deterioration in its production growth and in lithium prices.
• My past bullish case for lithium is nullified due to the Coronavirus' likely impact on EV production and sales.
• Given Livent's expected continued EPS decline, the stock should be trading at a much lower valuation.
• The stock's spike last Monday was likely a bull-trap.
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In November, I covered Livent Corp. (NYSE:LTHM) which is a rapidly growing producer of lithium. Since the article was written the stock has rallied slightly over 20% and I believe it would be a good time to take profits or even reverse short the stock.

The major catalyst for my long position was an expected rise in lithium prices backed by the rising production of electric vehicles and slow supply growth. While the stock has rallied, lithium prices have not since electric vehicle production in China has fallen to a standstill while the supply of lithium continues to grow with mines being planned to open this year.

Following the rally, LTHM is now an expensive company and, while its management has been very effective at promoting growth, is likely headed for a secular slowdown due to stalled vehicle production. Even if EV production turns back online, it seems that the world is headed for a global recession which will undoubtedly lower demand for new vehicles and expensive batteries.

Supply Chain Struggles

Livent crashed 15% two weeks ago when the company announced that it expected lithium prices to remain depressed through 2020. Looking at Trading Economics data, we can see that prices have generally declined by about 40% over the past year. This makes Lithium roughly 75% below its 2018 peak. Lithium prices have been down due to growing production from Livent and its competitors and lower-than-expected production from automakers like Tesla.

As discussed in my last article, about half of the company's revenue comes from battery sales and the other for medical, industrial, and scientific purposes. That said, the price impact of the slowdown in EV production is likely to bring prices down across the board.

Officially, Tesla's production in its Shanghai factory has officially resumed following a few weeks of the outage. Of course, being open is different than producing cars and there are many reports that Chinese workers are not going back. Pollution data in China would concur that far fewer factories are producing than normal.

Of course, most of Tesla's vehicles are not made in China and most EV's and non-EV batteries are made around the world. That said, almost all of these products that effect lithium demand contain at least some products made in China, so a bottleneck in China is likely to slow production everywhere once inventory runs low. Of course, the virus is now just about everywhere too.

To put it simply, the production of lithium-containing products is likely to crumble. It is difficult to know for how long because the information coming from China has dropped considerably due to a ban on foreign press and negative reporting.

At least China's manufacturing PMI is likely somewhat accurate:

Data by YCharts

Vehicle Demand is Not Going Anywhere Either

A lack of production will by default lower sales, but it is possible that China's reports of successfully stopping the virus are accurate and that production will resume. The question is, will demand?

Before the virus began there were signs of a coming economic slowdown. The ongoing global growth phase has been much longer than usual and has been kept alive by central bank liquidity. However, real economic data continued to trend lower before the virus got bad and is likely to fall faster as consumers stop big-ticket purchasing. Take a look at vehicle sales:

Data by YCharts

As you can see, there has been a generally down trend since 2016 with some negative acceleration in the last few months. I would be surprised if February and March data is not even lower due to virus-related concerns.

Again, this not guaranteed and is based on the fact that consumers may think themselves into a recession. If their friend says they are not buying a new car since they believe the economy is headed lower and layoffs are possible, they too will not buy a car and eventually, the situation can spiral into a recession. The same could be said for financial markets.

Overall, this is an undoubtedly bearish situation for the big-ticket items that fuel demand for lithium.

A Closer Look at LTHM's Financial Position

Strangely, over the nine months, LTHM's price has risen considerably while its revenue and earnings have declined. See below:

Data by YCharts

This can occur if forward guidance on a company is extremely positive and a turnaround is expected. That said, the company has released very negative forward guidance when it announced it expects lithium prices to remain depressed. The company also announced that it will slow the expansion of its Argentinean brine project over the next six months due to weak market conditions. This project was a major component of my bullish stance on the company.

Despite the tremendous downside risks of the company, the stock remains expensive on a historical basis as you can see below:

Data by YCharts

While Livent may be a growing company in a growing industry, it is a mining company at the end of the day and is highly susceptible to cyclical risks. Thus, it should not be trading at such extreme-forward valuations. Quite frankly, a 15X forward "P/E" or 10X forward "EV/EBITDA" would be more reasonable, though many mining companies that produce other metals trade at even lower valuations than that.

The Bottom Line

LTHM is a "sell" today with multiple active bearish catalysts. While I was bullish on the stock, the company rallied without the bullish factors I have in mind coming true (i.e higher lithium prices). Further, the Coronavirus black-swan event is very likely to keep lithium prices and sales volumes depressed this year (particularly for batteries). While lithium producers are likely to slow production growth, the fact is that lithium production will likely continue to grow in the face of falling demand and exacerbate the glut.

Overall, I believe LTHM is a "sell" with a target price of $4.5 to match a forward "P/E" just below 15X. That said, LTHM's earnings are likely to decline over the coming quarters so the stock may fall even lower. In my opinion, long investors should sell as soon as possible as I believe that Monday's equity gains are a bull-trap.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in LTHM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.