Thanks to the Fed’s rate hike, the stock market is likely to continue declining over the next few years. But some individual stocks are bucking this frustrating trend.

Such rare companies lead an industry in which strong demand exceeds supply – leading to growth that beats expectations and appears likely to continue into the future.

One company that fits the bill is Charlotte, North Carolina-based Albemarle, whose stock price is up 21% in the past year as the price of lithium, which accounts for much of its revenue, is up 220%.

This stunning price increase helped Albemarle grow rapidly in the June quarter and bolster its guidance – both of which exceeded investor expectations.

With the potential for lithium demand to exceed supply, Albemarle will be able to continue to raise prices and generate positive cash flow thanks to its lower costs — driving up its share price.

(I have no financial interest in the securities mentioned in this post).

Albermarli beats and lifts in the second quarter

Albemarle operates three divisions: Lithium — with battery-grade lithium plants in Australia, China, Chile and the United States, according to Zacks — bromine specialties and catalysts.

As of 2020, Albemarle — whose shares have risen nearly 14% annually since its 1994 IPO — was the largest provider of lowest-cost lithium electric vehicle (EV) batteries in the industry, according to Morningstar.

In the second quarter of 2022, Albemarle exceeded expectations for the quarter and raised its guidance. According to Investor’s Business Daily, Kent Masters, CEO of Albermarle, said,[the company] It benefits from strong demand and pricing trends, especially for lithium and bromine. Over the past year, we have changed our lithium contracting strategy to take greater benefits from these strong market dynamics. “

Albemarle exceeded expectations for the quarter and raised guidance for the full year. Here are the highlights:

  • Revenue increased by 91% To $1.48 billion - $20 million less than consensus
  • EPS increased 288% To $3.45 - 41 cents above consensus
  • Full year cash flow (FCF) positive In the past few months -- Albemarle's previous negative $1 billion forecast reversed, LookingAlpha noted.
  • Increased full-year revenue forecast by 20% to a range of $7.1 billion to $7.5 billion — the midpoint 121% higher than 2021 revenue
  • Full-year EPS guidance increased 52% to a range of $19.25 to $22.25

Lithium pricing power to remain high

Why is Albemarle raising her gaze so much? Lithium - which is used in batteries - is in high demand thanks to the growing popularity of electric vehicles. Lithium production cannot meet demand - leading to sky-high prices.

Demand for electric vehicles

Growth in new energy vehicles — including plug-in and battery hybrids — grew 63% worldwide in the first half of 2022 to about 4.2 million. Demand for electric vehicles is particularly strong in China - where the market is expected to double in 2022 to six million.

In the United States, demand for electric vehicles grew 62% in the first half of 2022 to 414 thousand. Demand is expected to continue to increase due to the passage of the Inflation Control Act in August 2022 that "extends tax credits for purchases of new electric vehicles and seeks to transform the US auto industry with incentives that would motivate automakers to accelerate production of zero-emissions new energy vehicles," according to Zacks.

Worldwide, global electric vehicle sales are expected to grow at an average annual rate of 19% from 6.6 million units in 2021 to 26.8 million units in 2029. Meanwhile, the global electric vehicle market is expected to grow at an annual rate It is 24.3% from $287.4 billion in 2021 to $1.32 trillion in 2028.

Insufficient supply of lithium

Electric vehicles cannot operate without batteries - which use large amounts of lithium. Lithium production has not kept pace with demand. And in August, lithium production fell further due to record heat waves in Sichuan - which account for 20% of China's lithium production.

Many lithium producers there were closed for two weeks because China could not produce enough electricity to meet demand for air conditioners. According to Zacks, power shortages in China may also limit production this winter when cold weather hits.

Lithium price hike

With demand outstripping supply, last year lithium prices rose 220% to $71,315 per ton. Car manufacturers — such as Ford and Stellantis — who bet in the electric car market have competed aggressively for long-term lithium supply contracts, according to Trading Economics.

Chilean producer Sociedad Coimica expects higher prices. Zacks noted that the company expects the "ultra-tight lithium market" to advance prices in the third quarter of 2022 to be higher than in the second quarter and to remain at that high level in the fourth quarter.

The upside in Albermarle shares is disguised

All these trends are bullish for Albemarle stock. The company will generate $4.5 billion in EBITDA in 2023 -- making its stock a bargain with four times EBITDA next year. The catalyst is that Albermarle is "well positioned to renegotiate the higher prices for its lithium business," according to LookingAlpha.

Albemarle is investing in more lithium production capacity which would enable it to profit from increased demand - especially if prices remain high. Specifically, Albemarle is investing in the Kemerton plant in Australia, in the La Negra III/IV expansion in Chile; production acceleration at the Silver Peak project in the US; and the acquisition of a factory in Qinzhou China, Zacks reported.

An economic downturn and a rising supply of lithium may undermine this bullish scenario. In the event of a downturn in the economy, demand for electric vehicles may not live up to bullish expectations. If Chinese lithium producers flood the market, lithium prices will fall and so will Albemarle stock.

One advantage of Albemarle is that lithium production costs are among the lowest in the industry. According to Morningtar analyst Seth Goldstein, Albemarle "is the world's largest lithium producer, generating the majority of total profits. Its operation in Chile is among the least expensive sources of lithium in the world."

If Albermarle can negotiate higher prices, its profit margins will widen. If prices go down, it will be in a position to continue making profits as higher-cost competitors keep their prices to maintain profitability - which could encourage customers to switch their business to Albemarle.

In early November, Albemarle is scheduled to release its third-quarter report. If the stock ticks and goes up, the stock will continue its upward journey.