Will Albemarle Reverse Course Today?

Shares of Albemarle are up over 1% during the pre-market session, after a harsh -7.9% sell off yesterday. At $251.45, ALB is 17.38% below its average analyst target price of $304.35. Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. Its average analyst rating for the stock is buy.

Albemarle's trailing 12 month P/E ratio is 116.4, based on its trailing Eps of $2.16. The company has a forward P/E ratio of 9.9 according to its forward Eps of $25.49 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US basic materials companies is 8.57, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Albemarle's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.15. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that ALB is actually fairly valued if we factor growth into the price to earnings calculus. One important caveat here is that PEG ratios are calculated on the basis of future earnings growth estimates, which may turn out to be wrong.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Albemarle's gross profit margin trends:

  • 2021 gross margins: 30.3%
  • 2020 gross margins: 31.9%
  • 2019 gross margins: 35.1%
  • 2018 gross margins: 36.6%
  • Average gross margin: 33.5%
  • Average gross margin growth rate: -6.1%
  • Coefficient of variability (lower numbers indicating more stability): 8.6%

While not the strongest, Albemarle's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Albemarle's last four annual reports, we are able to obtain the following rundown of its free cash flow:

  • 2021 free cash flow: $-609,410,000.00
  • 2020 free cash flow: $-51,563,000.00
  • 2019 free cash flow: $-132,422,000.00
  • 2018 free cash flow: $-153,826,000.00
  • Average free cash flow: $-609,410,000.00
  • Average free cash flown growth rate: -335.6%
  • Coefficient of variability (the lower the better): 106.5%

The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if ALB's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 0.6% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for basic materials companies is 1.86. In contrast, the average P/B ratio of the S&P 500 is 2.95. Albemarle's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so it's likely that equity investors are over-valuing the company's assets.

As of third quarter of 2022, Albemarle is likely overvalued because it has an inflated P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has mixed growth indicators because of its consistently average gross margins that are shrinking, and a PEG ratio of less than 1. We hope this analysis will inspire you to do your own research into ALB's fundamental values -- especially their trends over time.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.