Electric vehicles are shaping up to be the future of global transportation. The exponential growth of the EV sector has been well rewarded in the stock market, with Tesla Inc. (TSLA, Financial) emerging as the most valuable automaker stock in the world.
In addition to automakers, several other types of companies play a key role in this global transition, key among them lithium producers. Livent Corp. (LTHM, Financial), one of the leading lithium producers in the world, is thus at the center of the EV growth story, but the market has not been as kind to the stock. Livent's shares have gained a modest 15% in the last 12 months and have been highly volatile because of the company's strong correlation to lithium prices. Aided by favorable macroeconomic developments that are reshaping the transportation industry, I believe Livent is well-positioned to grow in the long run.
Lithium prices are recovering
The price of lithium carbonate reached record highs last year, only to shed most of those gains between November 2022 and April 2023. One of the major reasons for the sharp decline in prices during this period was the lower demand for EVs in China. The Asian economic powerhouse experienced an unusual decline in the demand for new EVs during this period as consumers were forced to stay indoors because of the government’s zero-Covid policy. China discontinued the subsidies offered to EVs in January as well, which was another big blow to demand.
After suffering from these setbacks, the demand for new EVs has gradually picked up in recent months, which has led to a strong recovery in lithium prices since the beginning of May. Lithium prices have almost doubled from April lows, and many analysts believe there is more upside in the foreseeable future. For example, commenting on the outlook for lithium, Sequoia Wealth senior wealth adviser Shane Langham said:
"I don’t see lithium as a one-off flash in the pan. The demand for lithium carbonate, or battery-grade lithium, is increasing at a rapid rate because of the rate of EV production increases. That doesn’t even touch on the big batteries used to support electricity grids or to store renewable electricity generated by solar or wind or the like. When the supply and demand equation is so lopsided, where demand is multiples the size of the supply, the price can do only one thing, and that is rise."
Rising lithium prices should help Livent expand its profit margins in the future. The company has come a long way in the last five years to improve its profitability. Back in 2017, Livent’s operating margin hovered just over 22%, but in 2022, the company reported an operating margin of close to 49%. This notable improvement came on the back of higher lithium prices, efficiency gains and scale advantages. With analysts projecting lithium supply to substantially fall short of demand at least through 2030, Livent is likely to see a meaningful improvement in its operating margins in the coming years.
EV sales set to continue growing
As investors, it is important to focus on the long term. Although the demand for EVs may not grow as expected in 2023 due to the threat of a recession, global supply-chain challenges and geopolitical tensions, the long-term outlook for the EV sector is bright. According to the International Energy Agency, more than 10 million EVs were sold in 2022 across the world, and sales are expected to grow 35% this year to 14 million. In the new global energy economy, EVs play a significant role as governments are laser-focused on achieving ambitious net-zero emission targets by 2030.
Today, technological advancements are addressing some of the key concerns faced by potential EV buyers. For example, advanced battery technologies are allowing for higher driving ranges, alleviating some of the concerns faced by drivers. In addition, the rise of independent charging solution providers is expanding the global EV charging network. The cost of designing and developing EV batteries is also on the decline, which paves the way for automakers to charge lower prices from customers for new vehicles with better driving technology and capabilities.
Livent enjoys cost advantages
Livent has access to one of the lowest-cost lithium carbonate production facilities in Argentina, which positions the company to enjoy cost advantages that could potentially lead to long-lasting competitive advantages.
The company’s planned merger with Alkem could also lead to cost advantages resulting from the scale of the combined entity. This business combination will create the fourth-largest producer of lithium globally, which should help the new business attract high-value clients. Livent is on track to grow its production capacity from 20,000 metric tons to 100,000 metric tons by 2030, and this planned merger is a step forward in the right direction to achieving this objective.
Takeaway
Livent is poised to benefit from the increasing adoption of EVs as the company plays a key role in the global EV supply chain. Building on its cost advantages, I believe Livent is likely to grow exponentially along with the EV industry, and since the market appears to be underestimating the stock, it is available for a cheap forward price-earnings ratio of 13.
