A First Look at Lithium Plays
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Beyond its use in pharmaceutical drugs and maybe the song of the same name by grunge rock legends Nirvana, I‘ve never given any thought to lithium, especially in the context of investing and investment ideas. Pharmaceuticals comprise only about 2% of the end uses for lithium, however, and the majority of global lithium supply is used for other industrial and technological applications. The metal, which occurs fairly abundantly in nature, is used in batteries, greases, ceramics, glass, castings, and aluminum products.
The biggest driver of growth in demand for lithium over the recent past has come from batteries and this trend is expected to continue for the foreseeable future. Lithium is used in batteries that power technology from cell phones and laptops to electric automobiles. The most recent U.S. Geological Survey report estimates that battery applications are second only to ceramics and glass in lithium demand, accounting for more than 25% of the total, and that growth in cell phones, particularly smartphones, will drive lithium demand.
Even though lithium is not traded on any metals exchange, there are several ways for investors to gain exposure to the metal such as ETFs like the Global X Lithium ETF (NYSEMKT: LIT), which is the simplest way to broadly invest in the sector. For investors looking to concentrate their lithium exposure with equities, several companies are traded publicly.
The four companies that control about 95% of the world’s lithium production will be poised to meet this demand and have raised their prices and are planning capacity expansion in response to higher demand. They are Talison Lithium, Rockwood Holdings (NYSE: ROC), Sociedad Quimica y Minera de Chile ADR (NYSE: SQM), and FMC Corp. (NYSE: FMC). Talison, based in Australia, is a lithium pure play that trades on the Toronto Stock Exchange (TSX: TLH) and does not file statements with the SEC, limiting participation by U.S. investors. Rockwood competes with Talison for the top spot in lithium production with about a third of the global supply but is less a pure play than Talison as it produces other materials. The other two players, SQM and FMC, also count lithium production as but one of their business segments. One other company, Polypore International, provides investors an indirect play on the expected demand for lithium with its microporous membranes used in lithium-ion batteries that go into power tools, tablets, and most importantly for future growth, into electric vehicles.
At a recent share price of about $46, Rockwood is attractively valued at a price to earnings to growth (PEG) multiple of only 1.1x. This valuation assumes consensus estimated forward EPS growth of 9.6% for 2013. This growth rate is lower than the historical EPS growth rate and is reduced from 11.3% estimated just 90 days ago. Among the lithium producers, FMC at a recent $54 per share, has the most attractive valuation at a PEG of 0.5x. Analysts are expecting forward EPS growth of 13.2% for FMC, which like Rockwood is lower than the historical growth rate for the company.
Despite the fact that it has demonstrated the fastest historical EPS growth since 2006, analysts are estimating the slowest forward growth for SQM at only 7.3%. As a result, its PEG multiple is unattractive at 2.9x. Polypore, the lone non-producer of lithium in this group, is even more attractive on a forward PEG basis than any of the lithium producers. Polypore, at a recent $34 per share, carries a PEG of only 0.4x because analysts are projecting forward EPS growth of almost 29% while the forward PE is 12.7x.
This preliminary analysis reveals that despite a historic growth rate that lags its peers, FMC is expected to grow faster than the two other lithium producers but that Polypore is expected to grow even faster and has the most appealing PEG ratio of the group. Investors interested in researching the lithium trade further can use this as a jumping off point to explore each company’s particular competitive advantages, cash flow potential, and balance sheet strength to make an informed decision about how to play the expected future demand for lithium.
56Steve has no positions in the stocks mentioned above. The Motley Fool owns shares of Rockwood Holdings. Motley Fool newsletter services recommend Polypore International and Sociedad Quimica y Minera (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.