Albemarle Corporation’s stock price has surged to a price of $236.25 today. Ending the day with a 5.5% increase, ALB shares outperformed the S&P500 and Dow Industrial composite indices by 4.6% and 5.0% respectively, but are still well below their 52 week high of $334.55. Over the last 12 months, Albemarle is down 7.1%, and has underperformed the S&P 500 by -10.0%. Now, the large-cap Basic Materials company is 22.94% below its average target price of $306.57 and has an average analyst rating of buy.
Albemarle's trailing 12 month price to earnings (P/E) ratio is 17.9, which is its share price divided by its trailing earnings per share (EPS) of $13.19. The company has a forward P/E ratio of 8.4 based on its forward EPS of $28.06 -- which is an estimate of future earnings provided by management. The P/E ratio tells us how much investors are willing to pay for each dollar of the company's net earnings from its sales operations. By way of comparison, the average P/E ratio of the Basic Materials sector is 8.57, but a company's price can remain stable for a long time even if it is over or undervalued.
Company accountants calculate earnings by subtracting the costs of sales and overhead from its revenues. These metrics focus on the sales side of the company only -- it's important to remember that companies can have many other costs and sources of income that are independent from its core business. For example, a company may have extensive expenses such as rent and debt servicing, and on the other hand it may receive additional income from its investments and intellectual property.
So the earnings picture only shows a slice of the company's financial health. They also don’t represent actual inflows of cash, since revenues are calculated on the basis of product or service deliveries, as opposed to actual payments received. The importance of earnings is that they enable us to analyze the company’s growth and profitability over time.
Here is an overview of Albemarle’s operating margins, which are the percentage of net profit compared to total revenues:
| Date Reported | Total Revenue ($ MM) | Operating Expenses ($ MM) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 3,328 | 496 | 15.1 | -6.62 |
| 2020-12-31 | 3,129 | 489 | 16.17 | -12.88 |
| 2019-12-31 | 3,589 | 592 | 18.56 | n/a |
- Average operating margins: 16.6 %
- Average operating margins growth rate: -9.8 %
- Coefficient of variability (the lower the better): 10.7 %
Let’s contrast the operating margins with an overview of Albemarle’s gross margins, which only take into account expenses directly related to producing revenue (i.e. without overhead):
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 3,328 | 2,330 | 29.99 | -5.69 |
| 2020-12-31 | 3,129 | 2,134 | 31.8 | -9.25 |
| 2019-12-31 | 3,589 | 2,332 | 35.04 | n/a |
- Average gross margins: 32.3 %
- Average gross margins growth rate: -7.5 %
- Coefficient of variability (the lower the better): 7.9 %
An alternative form of measuring a company's valuation is to focus on its Price to Book (P/B) Ratio, or the company's market price per share divided by its book value per share. The book value refers to the present value of the company if it were to be liquidated today (i.e. selling all assets and paying off all debts). Albemarle's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4.0, but is still below the average P/B ratio of the Basic Materials sector, which stands at 1.86.
ALB's average free cash flow in recent years is $-264,465,000.00. This represents the sum of inflows and outflows of cash from all sources, including capital expenses. This is the pool of liquidity from which the company can reinvest in its business or pay out dividends to its investors. If these negative cash flows continue, the company may not be able to continue offering its investors a dividend, which over the last year has offered a yield of 0.7%. While not ideal, negative free cash flows are common -- especially in capital intensive businesses or after a period of heavy re-investment.
Since it has a an inflated P/E ratio, an elevated P/B ratio, irregular and negative cash flows, and consistent operating margins, Albemarle is probably overvalued at current prices. Make sure to complement this brief quantitative review with a qualitative analysis of your own!
