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A Tesla plant.
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Things are looking pretty good for the lithium industry these days. Still, stock in lithium miner
Albemarle
tanked after reporting fourth-quarter earnings. The reasons for the drop were profit margins and fixed-cost absorption.
Tesla
investors should take note if they want to avoid Albemarle-like earnings shocks.
Albemarle’s (ticker: ALB) Wednesday evening earnings report contained a lot of good news. Prices for lithium are rising, and prices for some lithium products are up more than 100% over the past three months. And demand for lithium—a key component in electric-vehicle batteries—is growing faster than supply as auto makers lean into vehicle electrification.
What’s more, Albemarle reported 2021 Ebitda, short for earnings before interest, taxes, depreciation, and amortization, that exceeded the upper end of its guidance range. And management’s Ebitda guidance for 2022 for $1.23 billion topped Street estimates.
The result? Shares fell almost 20% Thursday. That’s the stock’s worst day on record according to Dow Jones Market Data. The drop is a far cry from the broader market, as the
S&P 500
dropped 2.1%, and the
Dow Jones Industrial Average
—on its worst day so far this year—slipped 1.8%.
Investors simply wanted more from Albemarle.
“I think people underestimated [we’re] starting up these new facilities,” CEO Kent Masters told Barron’s. Albemarle is growing its lithium capacity by more than 70% in 2022, giving it the ability to ship roughly 155,000 tons of lithium carbonate equivalent, up from roughly 90,000 tons in 2021. All that capacity doesn’t come on at once, however. It takes about two years to ramp up production. “All the people are there, but sales are not there,” added Masters.
That dynamic of all the fixed costs without all the potential sales pushes down profit margins. That’s low fixed-cost absorption in Wall Street jargon. And low fixed-cost absorption scared investors.
Tesla (TSLA) investors should watch out for that same dynamic. Tesla is starting up two new plants in 2022. One in Germany and the other in Texas. Wall Street expects the plants to produce roughly 100,000 vehicles at each facility in 2022—for a total of roughly 200,000 from the two new plants.
The plants each have a nameplate capacity of roughly 500,000 units. Like Albemarle, all the equipment and people will be there to produce a lot of cars. But it will take a while to get production ramped up.
Tesla is trying to get out in front of the issue. Chief Financial Officer Zachary Kirkhorn addressed profit margins on the company’s fourth-quarter conference call in January. He pointed out a number of headwinds to 2022 operating-profit margins including rising raw-material costs and the semiconductor shortage, which has constrained global automotive production for about a year. All of that “will result in higher fixed and semi-variable costs in the near term,” said the Kirkhorn, adding “in addition to the usual inefficiencies as we ramp a new factory.”
Kirkhorn is optimistic about margins in the long run. “We do expect to continue to see stronger operating margins as we grow our volumes and improve operating leverage,” added the CFO. “Over a longer-term horizon, we are quite optimistic about the expansion of margins.” Still, that’s a long-term forecast. Investor should be ready for margin volatility this year.
Wall Street currently projects Tesla will generate operating-profit margins of about 15% in 2022, flat with the 15% margin generated in the fourth quarter of 2021. Tesla is a high-growth company so the fourth-quarter operating profit is a good number for comparison.
The progression of profit margins at Tesla will be a key watch item for investors in 2022. Margin fluctuation could introduce some stock volatility, hopefully for Tesla bulls, not the level of volatility seen in Albemarle Thursday.
Barron’s recently wrote positively about Albemarle stock, believing it was one of the best ways to play the trend toward more EVs. Albemarle stock was about $250 when the story was published in late October. Now shares are closer to $200. All that decline, essentially, happened Thursday.
Write to Al Root at [email protected]
