With a daily gain of 5.97%, a 3-month loss of -31.35%, and an Earnings Per Share (EPS) (EPS) of 1.74, Livent Corp (LTHM, Financial) presents an intriguing investment opportunity. The question is, is the stock significantly undervalued? This article provides a detailed valuation analysis of Livent (LTHM), inviting readers to delve into the financials of this lithium producer.
Company Introduction
Livent is a pure-play lithium producer that was formed when FMC spun off its lithium business in October 2018. The company plans to merge with another pure-play lithium producer, Allkem, in an all-stock transaction that should close by the end of 2023. Livent should benefit from increased lithium demand via higher electric vehicle adoption, as lithium is a key component of EV batteries. The company's low-cost lithium carbonate production comes from brine resources in Argentina. Livent also operates downstream lithium hydroxide conversion plants in the United States and China and has a 50% stake in a fully integrated Canadian lithium project.
At its current price of $18.11 per share, Livent has a market cap of $3.30 billion. This article provides a comprehensive analysis of Livent's intrinsic value based on the GF Value, which is an estimation of fair value.
Summarizing GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
The stock of Livent (LTHM, Financial) is believed to be significantly undervalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Because Livent is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. A good initial perspective on the company's financial strength can be obtained by looking at the cash-to-debt ratio and interest coverage. Livent has a cash-to-debt ratio of 0.67, which ranks worse than 52.06% of 1506 companies in the Chemicals industry. Based on this, GuruFocus ranks Livent's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Livent has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $940.30 million and Earnings Per Share (EPS) of $1.74. Its operating margin of 50.48% better than 99.28% of 1526 companies in the Chemicals industry. Overall, GuruFocus ranks Livent's profitability as fair.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Livent is 15%, which ranks better than 66.67% of 1449 companies in the Chemicals industry. The 3-year average EBITDA growth rate is 49.6%, which ranks better than 90.3% of 1340 companies in the Chemicals industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Livent's return on invested capital is 22.88, and its cost of capital is 12.79.
Conclusion
In short, the stock of Livent (LTHM, Financial) is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 90.3% of 1340 companies in the Chemicals industry. To learn more about Livent stock, you can check out its 30-Year Financials here.
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