The boom in electric vehicles (EV) drove demand for EV batteries. Livent, which specializes in high-purity lithium used in batteries, has positioned itself for significant growth in this expanding market. In today’s FA Alpha Daily, we’ll explore the market’s outlook for the company through our Embedded Expectations Analysis framework.
FA Alpha Daily:
Tuesday Company Specific
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As the world increasingly turns to electric vehicles (EVs) for cleaner transportation, the demand for lithium, a crucial component in EV batteries, is skyrocketing.
This surge is creating vast opportunities in the lithium market, where companies like Livent (LTHM) are positioned to play a pivotal role.
It has carved a niche in producing high-purity lithium, essential for efficient EV batteries.
Their focus isn’t just on extraction, but on refining lithium to meet the high standards required for advanced battery technology. This dedication to quality sets Livent apart in the competitive lithium market.
With operations across continents, the company’s global presence is a major strength. From the lithium-abundant areas of South America to major markets in Asia and North America, they ensure a consistent supply to the rapidly expanding EV industry.
The lithium market, valued at around $4 billion in 2022, is expected to grow significantly, driven largely by the demand from the EV sector.
The company’s commitment to high-purity lithium production and its international operational network are key factors in leveraging this growth potential.
Livent’s strategic partnerships in the automotive and battery industries are not just business deals; they’re collaborations that foster innovation and improve lithium extraction and processing techniques.
The company demonstrates strategic planning and adaptability. Facing the ups and downs of the market, they’ve smartly invested in green practices and new tech, setting themselves up for success in a world that’s leaning green.
Strategically positioned as one of the main U.S. players in lithium, Livent was able to return a 20% Uniform ROA and 24% asset growth last year.
As the lithium market expands, Livent is well-positioned to maintain its strong performance.
However, the market fails to recognize this opportunity.
We can see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market seems to predict that the company’s uniform return on assets (ROA) will drop below 8%, anticipating a downturn in demand.
Given the surge in electric vehicle use and Livent’s key place in the lithium supply chain, the market’s current view seems too pessimistic.
Livent has a strong chance to grow its business and keep up with the expanding appetite for electric vehicles, staying a major player in this evolving field.
That is why Livent showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, Livent Corporation (LTHM) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.