Better Buy: Albemarle vs. DowDuPont
There's a reason we define periods of human civilization with labels such as Stone Age or Bronze Age: Materials make the world go round. That's as true today as it was when the Egyptians or Nubians were building pyramids or when Andrew Carnegie was building an empire out of steel. The players and materials change, but the potential for globe-altering impacts remains the same.
Two materials leaders of the early 21st century are lithium behemoth Albemarle (NYSE: ALB) and industrial conglomerate DowDuPont (NYSE: DWDP). Both offer investors who have a long-term mindset a compelling opportunity to build wealth. But if individual investors wanted to narrow down their options to just one business, which would be the better buy?
The case for the lithium leader
Albemarle is the largest producer of lithium on the planet, by far. While the segment was responsible for just 36% of the company's total revenue in the first nine months of 2018, it delivered year-over-year growth of 21% in that span compared to just 11% top-line growth for the entire business. The lithium segment also contributes $505 million (and growing) of adjusted EBITDA each year.
After doubts about the lithium industry's growth emerged in early 2018, Albemarle has gone to great lengths carefully explaining why the world's hunger for lithium is far from satiated. In addition to laying out its internal analysis on various markets, the company says long-term supply contracts with customers at fixed selling prices significantly de-risks expansion.
For instance, the business expects to boast annual production capacity of 80,000 metric tons of lithium hydroxide (a premium product) and 85,000 metric tons of lithium carbonate by 2021. Nearly 80% and 87%, respectively, of those volumes are currently entered into supply agreements. There are even commitments in place for 2025 and beyond.
While lithium is the top profit generator for the business and captures most of Wall Street's attention (and is the source of most of its anxieties), investors shouldn't overlook the fact that Albemarle ranks second globally in both bromine materials and industrial catalysts. The two segments generate annual adjusted EBITDA of $282 million and $292 million, respectively. Bromine materials are used to flame-proof electronics and construction materials, synthesize pharmaceuticals, and in oil and gas drilling fluids, among other applications with consistent demand.
Meanwhile, the company's catalysts are generally focused on petrochemical refining and they're going to be in significantly higher demand soon, thanks to a new global fuel standard that goes into effect in 2020. That's when ocean-going shipping vessels have to begin using low-sulfur fuels -- a mandate that could increase global diesel demand by 12 billion to 30 billion gallons per year -- and Albemarle is one of the few companies helping refiners efficiently manufacture cleaner distillates, such as diesel, on a global scale.
The case for the blue-chip conglomerate
DowDuPont outweighs Albemarle by over $100 billion in market cap -- for now. The conglomerate is preparing to split into three separate companies by the end of the first half of 2019. The breakup creates an intriguing opportunity to unlock value and drive long-term gains for individual investors.
The materials-science division will peel off first and should occur on the first day of April 2019. Far from an April Fool's joke, the business will retain the legacy brand name of Dow, sport $40 billion in annual sales at an approximately 20% operating margin, and save an estimated $100 million per year from operating as a stand-alone business. It will sell commodity chemicals and look to pounce on growth opportunities in packaging, infrastructure, and several consumer-care brands.
The remaining assets will then split one more time in June 2019. Specialty materials will retain the legacy brand name DuPont, while agricultural technology will become a new brand called Corteva Agriscience -- and one of the only pure-play companies in its industry following a wave of consolidation in recent years. DuPont is expected to deliver $21 billion in annual sales at a 25% operating margin, which is the highest profitability metric among the three companies. It will sell into high-value markets including electronics, transportation materials (read: car interiors), and performance-driven renewable materials.
That leaves Corteva Agriscience, which will walk away with the smallest portfolio generating "only" $14 billion in annual revenue at an operating margin of "only" 15%. It will focus on selling pesticides and genetic traits while pouring investment into the promising area of digital agriculture. That may prove key to the company's long-term success, especially with numerous headwinds facing global agriculture, but it could take years to move the needle for shareholders.
The better buy is...
Both materials stocks have a lot to offer investors, but Albemarle gets the edge in this head-to-head matchup. It has a strong all-around growth profile powered by its lithium segment, while the overlooked bromine and catalyst segments aren't slouches, either.
Meanwhile, the upcoming breakup of DowDuPont into three separate entities counts as a strike against it. Individual investors would be better off waiting for the spinoffs to be completed before pulling the trigger on the conglomerate, as the agricultural technology company Corteva Agriscience comes with risks that you may not want weighing down your portfolio.
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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.