Recent IPO Livent (LTHM), a producer of battery-grade
lithium primarily used in the electric vehicle market, has experienced a bit of
a rough ride. The stock’s 20 mln share IPO priced on October 11, meaning that its timing
certainly wasn't the most advantageous possible, as the stock market was then
in the midst of a sharp sell-off that plagued most of October.
To rewind, the IPO priced at $17, below the $18-$20 expected range, and then opened for trading at $16.25, down 4% out of the chute. Following a few days of sideways, choppy action, shares then nose-dived down to the $14 area on October 24, setting new lows in the process. No news or key events accounted for the weakness. Rather, LTHM was simply sinking lower along with the market in general.
Since hitting those lows, however, the stock has been in reversal mode, buoyed by a 3.6% push higher intraday on Friday, that took the stock near new highs. The stock spiked higher again at the open today, and the catalyst this morning is related to a few bullish analyst initiations, as the quiet period has expired.
Specifically, among the morning’s initiations, Nomura assigned a Buy to the stock; Credit Suisse initiated it with an Outperform rating; and, in the initiation that is probably garnering the most attention, Goldman Sachs started the stock at a Buy. This bullish round of initiations followed another Buy at Vertical Research on October 22, which also put a $20 price target on the stock.
Although the company hasn't reported earnings yet, its recent financials and growth rates are pretty impressive -- as illustrated below. For a higher growth name with expanding margins, the stock is also reasonably priced with a P/S of about 5x annualized FY18 revenue. So, given the favorable growth-to-valuation profile, it isn't overly surprising that analysts came out in support of LTHM today.
LTHM is a fully-integrated lithium company that develops battery-grade lithium hydroxide, butyllithium, and high purity lithium metal. Its primary focus is to supply high-performance lithium compounds for the electric vehicle battery market, while also maintaining its leadership position as a producer of butyllithium and lithium metal. The company believes that the strong expected growth in electric vehicles, along with its leadership position and low-cost structure, will continue to fuel its growth. LTHM is also diversified a bit as its products are also used in pharmaceutical products, as well as in aerospace applications.
The company believes it has a few significant competitive advantages. One such competitive advantage is that it operates one of the lowest cost lithium deposits in the world. Specifically, it has been extracting lithium brine at its operations at the Salar del Hombre Muerto in Argentina for more than 20 years and has been producing lithium compounds for over 60 years. LTHM's operations in Argentina are expandable, giving it the ability to increase lithium carbonate and lithium chloride production to meet increasing demand. It also has the operational flexibility to procure lithium carbonate from third party suppliers as raw materials. This strategy allows it to manage its production requirements and raw material cost, creating opportunities to optimize profitability.
In recent years, the company has been ramping up its production in order to meet rising demand. Specifically, in May 2016, LTHM announced plans to increase its lithium hydroxide capacity to 30 kMT by the end of 2019. In addition, to support its lithium hydroxide expansion, it has announced plans to expand lithium carbonate production in Argentina from 15 kMT in 2017 to at least 60 kMT by the end of 2025, in four separate stages. These expansions should ensure the company has the capacity to meet customer demands globally, as they expand their own production networks around the globe.
As noted above, LTHM's primary focus will be on the electric vehicle market due to the strong growth characteristics in that industry. To put the opportunity into context, EV sales are expected to reach 60.2 million units in 2040, representing a penetration rate of 55% of all vehicles sold, according to Bloomberg. Automotive original equipment manufacturers have announced plans to introduce longer-range EV models using higher energy density batteries and are increasingly doing so by moving to high nickel content cathode materials. This shift will increasingly require battery-grade lithium hydroxide in the production of cathode materials.
Another positive regarding its business model is that a good portion of its revenue is generated from customers which have long-term agreements with LTHM. In fact, in 2017 and for the six months ended June 30, 2018, more than 60% and approximately 58%, respectively, of its revenue was generated from customers which have agreements with terms ranging from two to more than five years in length.
Taking a look at its financials, for the six months ended June 30, 2018, revenue jumped by 51% year/year to $210.7 mln. This was due to both higher volumes of lithium hydroxide in China driven by the increased production capacity as well as increased pricing. On a regional basis, sales in North America increased 6%, sales in Asia increased 80%, and sales in Europe, the Middle East, and Africa increased by 42% while sales in Latin America decreased by 9%.
Gross margin as a percent of revenue was approximately 50% versus 41% in the six months ended June 30, 2017. The increase in gross margin was primarily driven by prices, product mix, and improved operating leverage.
As a result of the above, net income soared by 154% to $70.2 mln, and Adjusted EBITDA rocketed to $94.5 mln from $45.7 mln.
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