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Stock Strategist

Lithium Boosts Albemarle's Outlook

We expect the narrow-moat firm to double cash flows by 2020.

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Narrow-moat lithium producer  Albemarle (ALB) is one of the best ways to play higher electric and hybrid vehicle penetration. As the largest and one of the lowest-cost suppliers of lithium globally, Albemarle is well positioned to benefit from higher lithium demand and prices through its significant expansions in the coming years, with cash flows set to double by 2020. We believe the shares are undervalued, trading more than 20% below our $120 fair value estimate.

We think the market underestimates the potential for electric vehicles. Bears point to high costs and low range versus internal combustion engine vehicles as reasons adoption will not take off, noting that despite much fanfare and excitement, electric vehicles still made up less than 1% of global vehicle sales in 2015. Consensus forecasts electric vehicle adoption growing to 2%-3% by 2020 and 4%-5% by 2025--just enough to meet fuel efficiency requirements. While we also see regulation as the main driver through 2020, we expect far greater adoption in subsequent years as battery technology improvements allow electric vehicles to reach cost parity with internal combustion engines by 2025. We forecast electric vehicle penetration of 10% by 2025, comparable to the ramp rates of similar innovations that have reached cost parity. In absolute terms, electric vehicle sales should grow more than 30-fold from roughly 0.33 million units in 2015 to 11 million units by 2025, slightly more than the 10 million or so total vehicle sales for a top three global automaker.

David Wang, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.