Morgan Stanley Downgrades Albemarle On Supply, Pricing Concerns

Less than a week after Argus initiated coverage of Albemarle Corporation ALB with a Buy, another sell-side analyst assumed a different, bearish stance on the chemical company. 

The Analyst

Morgan Stanley analyst Vincent Andrews downgraded Albemarle from Equal-weight to Underweight and decreased the price target from $100 to $85.

The Thesis

The lithium market is projected to experience both "significant oversupply" and price drops as soon as 2019, Andrews said in a Monday note, citing his updated lithium supply and demand model. (See the analyst's track record here.) 

This will lead to a material reduction to Morgan Stanley's existing 2020-and-later EBITDA forecasts, he said. 

A more-than-expected increase in volume would offset some of the lithium price declines, Andrews said. A new technology initiative the company announced on Sept. 15 and an increase in annual quota from Chile for capacity expansion could help, he said. 

The two catalysts have the potential to drive up supply, putting further pressure on prices, Andrews said. 

"We have been far less bullish on lithium than the equity market for some time now." 

Bullish forecasts for the penetration rate in the electric vehicle market "seem aggressive" and rely too much on automakers' manufacturing promises without giving enough consideration to the consumer value proposition or needed infrastructure, the analyst said. 

Morgan Stanley expects a 9-percent EV penetration rate in 2025 compared to the 13-percent rate needed to maintain status quo. 

"Net, we think it is far more likely that EBITDA multiples mean revert lower (toward 12-times EBITDA) than back to 2017's peak (25 times)," Andrews said of Albemarle. 

The Price Action

Albemarle shares are up about 23 percent over the past year.

Albemarle shares were down 3.49 percent at $114.70 after the open Monday. 

Related Links:

Baird: Albemarle Is The Best Lithium Cycle Play

Oppenheimer Rates Albemarle Outperform, Sees 17% Upside From Here