Here’s How to Ride the Wave With Lithium Manufacturer Livent

News broke Wednesday afternoon. It appears that President Biden is preparing to invoke the Defense Production Act to help improve U.S. availability of lithium, nickel, cobalt, graphite, and manganese. Readers will recall that we learned early in the pandemic, implementation of the Defense Production Act allows the federal government to compel private sector companies to prioritize government contracts. The idea here will not be to boost production of PCE for healthcare workers, or ventilators for the ill, but to boost supplies of minerals necessary to the manufacture of electric powered vehicle batteries as the U.S. tries to decrease dependency on fossil fuels.

With the president expected to sign off later this week, lithium stocks have reacted favorably. My only current long in this space is Livent Corp.  (LTHM) . I also trade in and out of Albemarle (ALB) fairly regularly. Other relevant names would be Lithium Americas (LAC) , Piedmont Lithium (PLL) , Standard Lithium (SLI) , and MP Materials (MP) .

Using the DPA does not smooth out regulatory hurdles often faced by miners of minerals and ore, but could free up as much as $750M available under the DPA’s Title III fund. Being that I wrote to readers that I stand long Livent, let us go there.

Livent

Just who is Livent?

Philadelphia-based Livent Corp describes itself as a fully integrated lithium company. The firm manufactures lithium for use in a range of products for use primarily in lithium-based batteries, specialty polymers and chemical synthesis applications. The firm also produces lithium compounds, including battery-grade lithium hydroxide for use in high performance lithium batteries. The firm also supplies butyllithium, as well as a range of specialty lithium compounds including lithium metal which is used in non-rechargeable batteries, and in the production of lightweight materials for aerospace applications.

In mid-February, Livent reported fourth quarter GAAP EPS of $0.04 or adjusted EPS of $0.08 on revenue generation of $122.9M. The adjusted EPS and sales numbers both beat Wall Street as that sales number was also good enough for 49.5% year over year growth. This came on top of 43% growth the prior quarter and 57% growth the quarter before that. Adjusted EBITDA for the full year amounted to three times the same metric for the year prior.

The firm also announced a new 20K MT (metric ton) lithium carbonate expansion in Argentina even as the firm announced having received a “Gold” sustainability rating for a second consecutive year by EcoVadis. For the current fiscal year, Livent projected revenue of $540M to $600M, which translates into growth of 28% to 43%, and stands well above the $510M to $515M that Wall Street was looking for at the time. Wall Street consensus view is currently in the $555M to $560M range. The firm also sees adjusted EBITDA of $160M to $200M, which would, if realized, add up to annual growth of 130% to 188%.

Fundamentals

The stock is priced for growth, trading at 43 times forward earnings. Fortunately, sales and EBITDA are growing. For the quarter reported above, Livent saw cash from operations decline to $-14.6M, cash from investing decrease to $-69M, and cash from financing increase to $+1.1M. Net change in cash (off slightly due to rounding) came to $-82.3M. Free cash flow, already negative, dropped to $-0.48 per share.

As of year’s end, the firm had a net cash position of $113M, which was down significantly from September. Current assets amounted to $399.3M, which is down, not quite so much due to increases in inventories and accounts receivable. Current liabilities printed at $131.3M. That puts the firm’s current ratio at an extremely healthy 3.04. Total assets of $1.202.5B easily outweigh total liabilities less equity of $407.1M. Long-term debt adds up to $240.4. In Sarge’s world, I would like to see that debt load worked on, but I am very old school and fiscally conservative. Tangible book value comes to $4.91 per share. This balance sheet easily passes the Sarge test, and is in very solid shape.

My Thoughts

I have felt that for some time that Livent is ahead of the other lithium names mentioned above in terms of developing to the point where the firm could hit a serious, sustained stride in terms of growing the business. Albemarle is more the “blue chip” but more diversified in its businesses and not growing at nearly the same pace. MP Materials is probably ahead of LTHM, but is more of a rare earths and minerals play than a straight play on lithium. Hence, as a “sort of” best in class” in an industry really in its infancy, I have chosen to ride the wave in LTHM.

Readers will see that LTHM spent almost the entirety of calendar year 2022 to date sawing through a volume shelf that formed resistance. The stock appears free of that traffic for now. What I see is a sloppy double bottom reversal with a pivot of $25.50. The stock has successfully taken back its 50 day and 200 day SMAs as well as its 21 day EMA.

The Full Stochastics Oscillator as it often is, has been the first to cry “overbought” among my indicators. The Relative Strength Index and daily MACD appear to be in good shape, but not yet too far extended. I see potential for new resistance at the 61.8% Fibonacci retracement of the November through early March selloff. Past that spot, new highs are possible, but I will not initially be quite that aggressive.

Livent Corp 

– Target Price: $31

– Pivot: $25.50

– Panic: $22 (break of 50 day SMA)