Albemarle meets some but not all of Benjamin Graham's requirements for a defensive stock. The Chemicals company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.
Albemarle Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (6.54) * 6 year average book value per share (83.649) = $189.04
At today's price of $186.84 per share, Albemarle is now trading -1.2% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value
Albemarle’s average sales revenue over the last 6 years has been $5.69 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.
Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. Albemarle had positive retained earnings from 2009 to 2022 with an average of $2.3 Billion over this period.
Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.To determine Albemarle's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $2.09, $1.94, and $0.92 respectively. This gives us an average of $1.65 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $3.52, $1.06, and $22.84, for an average of $9.14. Now we see that Albemarle's EPS growth was 453.94% during this period, which satisfies Ben Graham's requirement.
Negative Current Asset to Liabilities Balance and a Decent Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Albemarle fails on both counts with a current ratio of 1.9 and a debt to net current asset ratio of -1.6.
Conclusion
Albemarle offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.
| 2018-02-28 | 2019-02-27 | 2020-04-15 | 2021-02-19 | 2022-02-22 | 2023-02-15 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $3,072 | $3,375 | $3,589 | $3,129 | $3,328 | $7,320 |
| Gross Margins | 36.0% | 36.0% | 35.0% | 32.0% | 30.0% | 42.0% |
| Operating Margins | 19% | 21% | 19% | 16% | 15% | 34% |
| Net Margins | 2.0% | 21.0% | 15.0% | 12.0% | 4.0% | 37.0% |
| Net Income (MM) | $55 | $694 | $533 | $376 | $124 | $2,690 |
| Net Interest Expense (MM) | -$115 | -$52 | -$58 | -$73 | -$61 | -$123 |
| Depreciation & Amort. (MM) | -$197 | -$201 | -$213 | -$232 | -$254 | -$301 |
| Earnings Per Share | $0.49 | $6.34 | $5.02 | $3.52 | $1.06 | $22.84 |
| EPS Growth | n/a | 1193.88% | -20.82% | -29.88% | -69.89% | 2054.72% |
| Diluted Shares (MM) | 112 | 109 | 106 | 107 | 117 | 118 |
| Free Cash Flow (MM) | $622 | $1,246 | $1,561 | $1,649 | $1,298 | $3,169 |
| Capital Expenditures (MM) | -$318 | -$700 | -$841 | -$850 | -$954 | -$1,262 |
| Net Current Assets (MM) | -$1,456 | -$1,824 | -$3,542 | -$3,776 | -$3,175 | -$2,079 |
| Long Term Debt (MM) | $1,415 | $1,398 | $2,863 | $2,767 | $2,004 | $3,215 |
| Net Debt / EBITDA | 0.89 | 1.28 | 2.77 | 3.83 | 2.58 | 0.62 |
