Investing in Lithium: The Energy Giants

by Friday, September 26, 2014

This metal is perhaps best known for its use in lithium batteries common in all sorts of electronics devices.


Lithium is a soft, silver-white metal that is highly reactive and flammable. Its unique chemical profile makes it the lightest metal and the least dense solid element. Lithium has several other industrial applications as well, including use in heat resistant glass and ceramics, alloys used in aircraft, and lubricating greases.

As an investment, lithium makes for an enticing play on the growing demand for energy efficient technologies. Lithium batteries, which are far more efficient than traditional nickel-metal hydride batteries, are seeing an increase in demand from the automobile and electronics industry alike.

Limited supply is another appealing factor that makes this metal a potentially lucrative investment. For those looking to invest in lithium, there are a number of options in the marketplace. While physical exposure is not possible, investors can buy a number of companies which are engaged in some aspect of lithium production. Lastly, investors can also purchase a lithium ETF which offers exposure to a basket of commodity producers.

How to Buy Lithium Stocks

There are a wide variety of companies who rely on lithium for a substantial portion of their revenues. One of the biggest is Sociedad Quimica y Minera (SQM) which is a Chilean producer of specialty plant nutrients and chemicals that maintains lithium production operations. Philadelphia-based FMC Corporation (FMC) is a diversified chemical company which also focuses on this rare metal. Rockwood Holdings (ROC) is another prominent manufacturer which is focused on the production of lithium chemicals.

How to Buy Lithium ETFs

Exchange traded products can be an efficient way to access lithium. The most targeted product is the Global X Lithium ETF (LIT), which offers investors exposure to the performance of the lithium industry. This ETF holds a global portfolio of companies engaged in everything from lithium mining to exploration and lithium-ion battery production.

Tesla Motors, Inc.’s (TSLA – Analyst Report) decision to build a $5 billion Gigafactory to meet its requirement of lithium-ion battery packs brought glaring focus on the shortage of supply of this emerging energy storage technology. Lithium-ion batteries are used by many auto manufacturers, including General Motors Co. (GM – Analyst Report), Navistar International Corp. (NAV – Analyst Report), BMW, Daimler AG (DDAIF) and Ford Motor Co. (F – Analyst Report). They are also used in cellphones, laptops, and other electronic devices as well as in the aerospace and defense sector.

However, the market for lithium-ion batteries has a lot of untapped potential. Tesla, for example, is facing problems in meeting the demand for its electric cars due to shortage of battery packs, which is limiting its production capacity. This was one of the chief reasons behind its decision to build a large-scale factory to produce lithium-ion batteries in collaboration with various partners. The electric carmaker’s Japanese battery pack supplier, Panasonic Corp. (PCRFY), is widely believed to be one of the partners.

By 2020, Tesla expects the annual lithium-ion battery production of the Gigafactory to exceed the global production in 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars annually by 2020.

However, Tesla’s Gigafactory will not start production until at least 2017. Till then, the focus will be on other lithium-ion battery manufacturers. Thus, it would be a good idea to invest in some companies that manufacture these batteries.

Two of our Favorite Stocks to Watch:

Arotech Corp. (ARTX) has two business divisions – Training and Simulation and Battery and Power Systems. The Battery and Power Systems division manufactures and sells Lithium and Zinc-Air batteries and chargers for the Military.

Arotech reported a 150% positive earnings surprise in the third quarter of 2013. This Zacks Rank #3 (Hold) stock is expected to report 100% and 411.11% year-over-year growth in earnings per share (EPS) in fourth-quarter and full-year 2013, respectively, based on the Zacks Consensus Estimate of 2 cents and 28 cents, respectively.

Arotech has a price-to-book (P/B) ratio of 1.3x, significantly lower than the industry average of 3.1x. Even the price-to-sales (P/S) ratio of 0.6x is lower than the industry average of 0.9x.

EnerSys (ENS – Snapshot Report) is the largest manufacturer, marketer and distributor of industrial batteries in the world. It also manufactures and distributes chargers, power equipments and battery accessories and provides aftermarket services for industrial batteries. The company recognizes the growing market share of lithium-based battery technology in the aerospace and defense sector, and is thus trying to develop products based on lithium and other new energy storage technologies to increase its market share in the aerospace and defense sector.

EnerSys, a Zacks Rank #2 (Buy) stock, reported a positive earnings surprise in each of the trailing 4 quarters with an average beat of 3.44%. The Zacks Consensus Estimate for the company’s fiscal 2014 (ending Mar 31, 2014) earnings is $3.87 per share, reflecting an estimated 9.01% year-over-year growth.

EnerSys has P/B ratio of 2.6x, far below the industry average of 6.5x. Its P/S ratio is 1.5x, also lower than the industry average of 1.9x. Long-term EPS growth rate for the stock has been pegged at 15.3%.

Read Investing in Lithium: The Energy Giants Part 2

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