Wall Street Rains on Albemarle's Solid Q1 Performance

Despite strong operations and progress on long-term growth initiatives, Wall Street has sent shares of Albemarle (ALB 0.31%) down 43% since the start of 2018. Analysts aren't the only thing raining on the business lately.

Heavy rains in Chile significantly delayed lithium production from major assets this January, which stalled growth from the otherwise reliable lithium segment. Revenue and adjusted EBITDA fell 2% and 12%, respectively, compared to the year-ago period.

Luckily for the business, strong revenue growth from the bromine and catalysts segments helped to offset some of the weakness from lithium. Wall Street didn't hesitate to send shares lower after operating results were announced, but investors with a long-term mindset will find little reason for worry.

Image source: Getty Images.

By the numbers

How does rain stop the world's largest lithium producer in its tracks? Well, some 80% of global lithium production is sourced from the Lithium Triangle in South America. The region is home to high-grade lithium brines from which various salt products -- potassium, chlorine, and lithium among them -- are extracted using evaporation ponds. The low-cost production method works thanks to the region's arid climate, but the occasional summer storm (Chile is in the Southern Hemisphere) can disrupt the time-consuming method and significantly delay in-process production.

That's what happened in January. Albemarle reported that its lithium segment saw a 12% year-over-year decrease in adjusted EBITDA despite a 3% increase in selling prices. That weighed on the financial output of the entire business in the first quarter, but strength in the company's more mature segments helped to provide a backstop: 

Data source: Press release. YOY = year over year.

Both the bromine and catalysts segments enjoyed benefits from pricing and volume gains in the first quarter. The former continued to see strong demand for flame retardants and offshore drilling fluids. The latter actually turned in a solid performance when discontinued operations -- assets sold in 2018 -- are excluded from Q1 2018 results. The pro forma comparison shows revenue and adjusted EBITDA increased 8% and 5%, respectively, year over year. 

That gave management confidence to stick with its initial full-year 2019 guidance calling for 9% to 15% revenue growth compared to pro forma 2018 results, as well as 7% to 14% growth in adjusted EBITDA on the same basis. Operating cash flow is expected to increase 40% to 50% year over year. 

Albemarle's confidence in the year ahead is welcome news for investors, especially after comparing recent income statement metrics: 

Data source: Press release.

There are a few things for investors to consider about the table above. For revenue, Albemarle provided a pro forma comparison to account for asset divestitures in the catalysts segment that contributed sales in the year-ago period but not in 2019. Adjusting for that, the business reported 5% year-over-year growth in net sales.

It's also worth keeping an eye on a few loose ends. Research and development expenses declined 29% year over year due to lower-than-expected spending in the lithium segment. That's not a great sign, although it could be just another casualty of Chilean rains and therefore short-term in nature. Similarly, the boost in net income came from a $41 million swing in "other income" from last year to this year, which isn't likely to repeat.

Finally, Albemarle reported a 48% increase in corporate expenses, accounted for as a separate "segment" when tallying adjusted EBITDA, primarily due to higher professional services. An extra $9 million in quarterly professional services expense probably isn't a random fluctuation. Is it tied to growth project investments, or perhaps due diligence for an acquisition? 

A solid long-term investment, rain or shine

Albemarle can't control the weather, but it did enough to control the factors within reach. Management reassured investors not to worry over the short-term headwinds encountered in the lithium segment by stating that customers are sticking to long-term purchase agreements and selling prices will remain at least as high as 2018. It helps that the bromine and catalysts segments demonstrated strength and served as a reminder not to overlook the mature businesses. Long story short, the investment thesis hasn't changed and the company's growth remains on track.