“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, November 19, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Albemarle Corporation (NYSE: ALB) Calls

Tuesday November 20, 2018

** OPTION TRADE: Buy the ALB MARCH 15 2019 110.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Also include a protective stop loss of $1.20.

Albemarle Corporation (NYSE: ALB), specialty chemicals company, will keep growing, supported by the major automakers that are increasingly focusing on their electric vehicle (EV) line-ups. That's what will drive results at Albemarle, which has three divisions…..

  • …..Bromine, which is used in heat shielding in electrical products;
  • …..Catalysts, used in the refining sector; and
  • …..Lithium, which is used in automobile batteries.

The first two are helping the company to fund its expansion in lithium, though the company notes that it may, at some point, end up focusing solely on lithium.  

The growth potential for its lithium business is huge. It currently plans to increase lithium production by as much as 60% by 2021. Positive factors are …..

1.       The company is sustainably profitable, with positive earnings in each of the last 10 years.

2.      Long-term debt only makes up about 30% of its capital structure. Essentially, it is in much better shape to support its growth plans than Tesla.  

3.      Albemarle doesn't have to succeed in building a new car brand. Demand for lithium will keep expanding as long as the EV market keeps expanding. Right now, Albemarle is projecting 35% compound annual growth in lithium demand between 2017 and 2025. The lithium maker has a lot of other customers looking for its product.

So no matter what happens, Albemarle looks set to benefit from the broader move toward electric vehicles.    

Albemarle’s shares have gained around 7.2% in the past three months, outperforming the roughly 11.9% decline recorded by its industry.

About Albemarle…..

Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. Its Lithium and Advanced Materials segment offers lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties, as well as reagents, such as butyllithium and lithium aluminum hydride for applications in lithium batteries for consumer electronics and automobiles, high performance greases, thermoplastic elastomers for car tires, rubber soles, plastic bottles, catalysts for chemical reactions, organic synthesis processes, life science, pharmaceutical, and other markets.

Past Performance…..

Albemarle Corporation saw its profits rise in the third quarter of 2018. The chemical maker posted a profit of $129.7 million, or $1.20 per share in the quarter, a roughly 9% increase from $118.7 million or $1.06 per share year ago. The bottom line in the reported quarter was supported by higher lithium prices and earnings growth across the company’s Bromine Specialties and Catalysts units.

Barring one-time items, adjusted earnings for the reported quarter were $1.31 per share, topping the Zacks Consensus Estimate of $1.25.

Revenues rose around 3% year over year to $777.7 million in the quarter. It trailed the Zacks Consensus Estimate of $804.4 million.

Revenues, in the reported quarter, were aided by favorable pricing across the board and increased sales volumes in Bromine Specialties and Catalysts. This was, in part, offset by reduced volumes in lithium due to shut downs at three of Albemarle’s manufacturing sites and the impact of the divestment of the polyolefin catalysts and components portion of the Performance Catalyst Solutions ("PCS") business.

Future Earnings…..

Albemarle backed its guidance for 2018. The company continues to see adjusted earnings for the year to be in the band of $5.30-$5.50 per share, a year-over-year increase of 15%-20%.

The company also envisions net sales for 2018 to be between $3.3 billion and $3.5 billion. Adjusted EBITDA for the year has been forecast in the range of $990 million to $1,020 million.

Moving Forward…..

The world’s largest lithium producer is planning to expand production in Australia, chasing the market for a form of the metal increasingly being used by the makers of electric car batteries.

Albemarle Corp. will halt plans to expand its lithium carbonate production in Chile, the company said on Thursday. Instead, it will plow funding into a Western Australia project that produces lithium hydroxide, a rarer form of the metal that’s growing in use and currently sells for higher prices than the carbonate form.

Lithium hydroxide works better with cathodes containing higher levels of nickel, helping cars go further on a single charge. Global demand for lithium overall is expected to almost triple by 2025, according to Bloomberg NEF, as carmakers such as Tesla Inc. look to boost sales of battered-powered vehicles.

Influencing Factors…..

With long-term debt at about 30% of the capital structure, the balance sheet is strong enough to fund growth spending, which, it is worth noting, the company's two other businesses are also helping to support. So, lithium is the product to watch, but Albemarle is no one-trick pony today, even though it has hinted that it may eventually focus exclusively on lithium someday. And despite the stock price pullback, the company has been doing quite well: The third quarter was the eighth consecutive quarter of double-digit EBITDA growth. 

The company has secured an agreement with the Chilean government to increase production in a region known for low-cost extraction. Analysts at Morgan Stanley have warned that the supply increase could weigh on prices but it could also shake out high-cost producers in Australia and other regions.

Albemarle controls roughly a third of the lithium carbonate market and benefits from double-digit annual demand growth, primarily from electric vehicles. The company has a solid balance sheet with $641 million in cash and $1.4 billion in long-term debt. The company returned more than $390 million, about 3.6% of the market cap, to investors last year through a buyback and dividend.

Albemarle Corporation ALB is launching XPLORE, a platform for the clean transportation fuels market. The XPLORE catalyst platform has resulted from breakthrough research in hydroprocessing catalyst technology, which allows refineries to produce clean transportation fuels in a more efficient way.

Per Albemarle, first grade KF 787 PULSAR is an innovative, premium catalyst line, geared for the production of clean diesel. It was developed to boost returns for refiners who process cracked feedstock and high nitrogen despite limited availability of hydrogen and low operating pressure. The company is committed to innovation in the market through KF 787 PULSAR and the XPLORE platform technology.

Analysts Opinions

Albemarle was upgraded by analysts at ValuEngine from a “sell” rating to a “hold” rating in a note issued to investors on Thursday, November 1st.

As well, Albemarle received a $130.00 price target from analysts at Berenberg Bank in a research note issued to investors on Friday, November 9th. The firm currently has a “buy” rating on the specialty chemicals company’s stock. Berenberg Bank’s price objective would indicate a potential upside of 28.74% from the stock’s current price.

Several other equities analysts have recently commented on the company…..

  • SunTrust Banks raised Albemarle from a “hold” rating to a “buy” rating and lifted their target price for the company from $110.00 to $115.00 in a research report on Tuesday, September 4th.
  • Zacks Investment Research raised Albemarle from a “hold” rating to a “buy” rating and set a $104.00 price objective on the stock in a research report on Tuesday, August 7th.
  • Loop Capital set a $130.00 price objective on Albemarle and gave the stock a “buy” rating in a research report on Friday, October 19th.
  • Finally, Vertical Research initiated coverage on shares of Albemarle in a report on Tuesday, September 25th.

Two analysts have rated the stock with a sell rating, two have assigned a hold rating and eighteen have assigned a buy rating to the company. The company has an average rating of “Buy” and an average price target of $124.25.

Summary

Albemarle Corp. has a market cap of $10.58 billion; its shares were traded around $99.61 Monday with a price-earnings ratio of 31.72 and price-sales ratio of 3.34. The trailing 12-month dividend yield of Albemarle Corp. stocks is 1.32%. The forward dividend yield of Albemarle Corp stocks is 1.33%. Albemarle Corp. had an annual average earnings growth of 6.30% over the past 10 years.