Why should I buy LG Energy Solution stock?

LG Energy Solution is the second-largest company in the electric vehicle battery market, and has contracts with various customers at home and abroad. Recently, it has expanded its cooperation with Tesla and built new factories in the United States and Europe, strengthening its global competitiveness. Despite these achievements and prospects, many experts say that LG Energy Solution stock is currently undervalued. In this article, I will analyze the advantages and disadvantages of LG Energy Solution stock, as well as its fair value and target price.

Advantages of LG Energy Solution stock

The biggest advantage of LG Energy Solution stock is the growth potential of the electric vehicle battery market. The electric vehicle market is growing at a double-digit rate every year due to environmental regulations, technological advances, and government support, and is expected to sell more than 100 million units by 2030. This growth of the electric vehicle market naturally leads to the growth of the battery market, and LG Energy Solution has about 25% of this market share. LG Energy Solution has contracts with various automakers such as Tesla, Volkswagen, GM, Hyundai Kia Motors, and recently signed a long-term contract worth 10 trillion won with Audi for 10 years. In addition, LG Energy Solution has technology capabilities such as battery performance, safety, and cost reduction, and is also developing next-generation batteries such as solid-state batteries.

Another advantage of LG Energy Solution stock is that there are few available shares. LG Energy Solution is a company that spun off from LG Chem last December, and 81.84% of the total 234,000,000 shares are held by LG Chem. Therefore, the actual number of shares in circulation is very small, about 42,480,000 shares. This means that the price volatility is high, but it also means that the price increase effect can be large if demand exceeds supply.

Disadvantages of LG Energy Solution stock

The biggest disadvantage of LG Energy Solution stock is the competitive pressure. The electric vehicle battery market is fiercely competitive worldwide, and LG Energy Solution competes with Chinese companies such as CATL and BYD, and Japanese companies such as Panasonic. In particular, CATL is expanding its market share with low prices and large-scale production capacity, and has a cooperative relationship with Tesla. In addition, LG Energy Solution is pursuing factory construction and expansion in the United States and Europe, but this may entail high costs and regulatory risks. Furthermore, LG Energy Solution has been criticized for damaging consumer trust and image due to battery fire incidents.

Another disadvantage of LG Energy Solution stock is excessive expectations. LG Energy Solution’s stock price has risen sharply since its listing last December. However, this is criticized as reflecting the overheated expectations of the market rather than the intrinsic value of the electric vehicle market growth and technology capabilities. In fact, LG Energy Solution’s PER (price-to-earnings ratio) is currently 129.89 times higher than the industry average of 68.60 times. This means that LG Energy Solution’s profitability is low or its stock price is overvalued.

Fair value and target price of LG Energy Solution stock

There are various ways to analyze the fair value and target price of LG Energy Solution stock. Here I will introduce a simple method using EPS (earnings per share) and PER (price-to-earnings ratio).

EPS is the value obtained by dividing the net income attributable to the controlling company for the recent four quarters by the adjusted average number of shares issued, and PER is the value obtained by dividing the current price by EPS. If you know EPS and PER, you can calculate the fair value as follows: fair value = EPS x PER.

LG Energy Solution’s EPS (2023.03) is 4,450 won and PER (2023.03) is 129.89 times. Therefore, fair value = 4,450 x 129.89 = 577,855 won.

The target price is the expected price to be reached within a certain period of time in the future. To calculate the target price, use estimated EPS and estimated PER. Estimated EPS is the average value (consensus) of securities estimates for this year’s expected EPS, and estimated PER can be calculated as current PER x (1 + growth rate) based on current PER.