Livent Stock: A Powerful EV Battery Play

As far as lithium pure plays go, Livent (NYSE:LTHM) may be as good as it gets. Lithium is known as the lightest metal but has some of the strongest investment implications including its use in electric vehicle (EV) batteries and consumer electronics.

The electric vehicle space has taken a breather in recent weeks as the market has recalibrated the valuations of some of the highest-flying stocks. The good news is the electric vehicle story isn't going away nor is the need for lithium. With Livent shares now trading approximately 25% off their January 20^th peak, this appears to be as good a time as any to add some lithium battery power to a long-term growth portfolio.

What Does Livent Do?

Livent is a spin-off of chemical company FMC Corporation that has been in the lithium business for over 60 years. Its best-known product is lithium hydroxide which is used to make lithium batteries. The non-battery grade version of the material is used to make greases such as those used in car tires and industrial sealants. Livent's other lithium products are involved in pharmaceutical and polymer production as well as aircraft manufacturing.

What's so special about a lithium battery? Besides being lightweight, this type of rechargeable battery has a higher energy density than lead-acid or nickel-cadmium batteries. This equates to a longer battery life and higher mileage for electric vehicles.

And where is Livent getting all of this lithium from? Most of it is derived from the Salar del Hombre Muerto salt pan in Argentina in addition to a resource in Canada. This lithium brine is converted into various lithium compounds at Livent's manufacturing facilities in the U.S., U.K., China, and India.

What are Livent's Growth Prospects?

In the near-term Livent is expected to benefit from better lithium pricing that stems from a decrease in global supply. The shrinking supply combined with rising demand for lithium EV batteries should be a nice springboard for growth in the back half of the year. For all of 2021 management is forecasting revenue of $350 million at the midpoint.

Looking further down the road, electric vehicles will become more and more mainstream. As governments worldwide move towards a carbonless environment, pressure will be on automakers to increase their EV and hybrid offerings. Eventually consumers may find it difficult to shop for a car that doesn't run on a rechargeable battery. As a lithium supplier to both Tesla and BMW, Livent is in the driver's seat of a lucrative long-term growth opportunity.

Of course, there is not an unlimited supply of lithium in the world and recent concerns about the possibility that the lithium supply is exhausted before the end of the decade are valid. This has left some to wonder if nickel-metal hydride, lead-acid, and ultracapacitors will someday pick up the slack. Emerging battery technologies that don't involve lithium also pose a threat to how long the lithium ride lasts.

Despite these risks, lithium should have plenty of longevity in both EV and non-EV applications. Consulting firm Roskill Information Services estimates that demand for lithium will grow at a 15% annual rate through 2027 with one-third of the demand coming from companies that don't manufacture electric vehicles.

But that's not to minimize the growth potential of the EV market. As EV manufacturers face increased competition from traditional automakers, they will be seeking ways to differentiate their cars. One way will be to produce vehicles that have longer ranges—and therefore, lithium's high-density properties should keep it in high demand.

Is Livent Stock a Buy?

With a $2.6 billion market cap, Livent is a mid-cap lithium stock with plenty of room to grow. The investment is widely considered a play on EV batteries, but it has exposure to several other growth markets in portable electronic devices, pharmaceuticals, and agrochemicals.

Livent is trading less than a $1 from its October 2018 IPO price after a disappointing fourth quarter report sent some traders to the exits. Lower sales volumes and weaker pricing were to blame for the swing from a profit to a loss. This is likely to be a temporary pandemic-driven headwind. Soon EV battery needs, and lithium inventory reductions should soon help demand outpace supply.

Moreover, lost in the fourth quarter financial performance was Livent's announcement of a long-term supply agreement with BMW. Under the terms of the multiyear deal, Livent will supply lithium hydroxide and lithium carbonate for the carmaker's EV battery ambitions. BWM is shooting for electric vehicles to account for as much as 25% of its sales by 2025. Livent expects to begin shipment to BWM by next year.

So, in effect, Livent is having a second IPO that longer-term investors should pounce on. The valuation is far from cheap with the stock going for 48x the consensus earnings estimate for 2022. But the price tag is still worth it, given the electrifying growth ahead.