By Victor Reklaitis, MarketWatch
As Yogi Berra might have put it: Nobody buys Tesla stock anymore. It’s too popular.
Yet the hunt continues for promising bets on rising demand for electric vehicles, and battery-materials company Umicore /zigman2/quotes/200065231/delayed BE:UMI -0.94% could fit the bill.
“There are very few EV champions—companies that have a meaningful percentage of their profits today coming from the electrification megatrend,” says Adam Collins, an analyst at investment firm Liberum covering specialty chemicals and new energy technologies. “We, in our notes, have been talking about possibly four: Albemarle, the lithium leader; Tesla, I don’t have to introduce them; Infineon Technologies, in the power semiconductors space; and Umicore, in cathode materials.”
What makes Umicore special, Collins reckons, is that it generates about 10% of its earnings from EV-related business, while the corresponding figures for U.S. chemicals giant Albemarle /zigman2/quotes/200578017/composite ALB +0.64% and German chip maker Infineon /zigman2/quotes/204995926/delayed DE:IFX -1.91% are lower, and Tesla /zigman2/quotes/203558040/composite TSLA +4.26% hasn’t turned a profit yet. About 60% of Umicore’s profit could come from EVs by 2020, Liberum estimates.
“It’s shaping up to be by far and away the market leader in the key performance driver for the battery—in a market that we think is set to grow something like 20 times by 2025,” Collins says.
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One knock against the Belgian company’s shares: They don’t look cheap, after doubling in two years. Umicore trades at 31 times estimated forward-year profits. The stock’s valuation merits a Hold, even as growth in the energy business is becoming clearly visible, boosted by gains in battery materials, writes Deutsche Bank analyst Tim Jones in a recent note. Deutsche Bank puts a price target of 46 euros ($57) on the stock. That’s close to its recent print and near the average target of €45 from a FactSet survey of analysts.
But, counters Collins, whose price target of €52 implies a rally of about 16%: “Looking at the current year price/earnings ratio is insufficient for a stock that is set to grow at a rate of almost 20% per annum.” Umicore’s earnings are expected to rise 23% this year, 18% next year, and 19% in 2020. In his analysis, Collins emphasizes earnings before interest, taxes, depreciation, and amortization, a measure of cash flow.
“If we scroll forward to 2019, this is a company that is going to be trading on a multiple of Ebitda of something like eight to nine times,” he says. “It’ll have a 40% share of the EV market, and that EV market will only be 10% penetrated—still 18 out of 20 cars will not be electrified.” Research outfits have been lifting their electric-vehicle forecasts, with the International Energy Agency saying the worldwide stock of electric vehicles could rise to nine million by 2020, and may even hit 20 million that year, up from just two million in 2016.
Cobalt is crucial to EV batteries, and Umicore’s experience in acquiring that metal is “a source of competitive advantage,” says, Collins who has a Buy rating on shares. “It accounts for roughly 10% of the cobalt consumed globally, not just for its batteries business, but also for its abrasives and aerospace business.”
Another edge: Umicore is “extremely capacity ready,” thanks in part to $1.1 billion it raised recently in an equity placement.
The $2 billion Fidelity International Capital Appreciation fund /zigman2/quotes/201251306/realtime FIVFX +0.20% , managed by Sammy Simnegar, is among the big U.S. mutual funds wagering on Umicore. Simnegar says the auto industry is being “massively disrupted” by electric cars, and he thinks that Umicore and Infineon, another holding, should benefit. (See “ Looking for the International Everyman ,” Mutual Fund Profile, Dec. 16, 2017.)
To be sure, bears have good reasons to be skeptical. “The big risk issue for all these sorts of companies—they are technology plays—is technology obsolescence,” Collins says. Another fear is that China—“the motor of electric-vehicle growth”—could scrap its big EV push, though that looks unlikely. And “a trade war wouldn’t be terribly helpful,” the analyst adds. But he notes that the company is spreading its production facilities. A European location is in the works, with site selection expected this year. That would complement existing operations in China and South Korea.
This report also appears at Barrons.com.
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