Top broker upgrades Galaxy Resources shares to an outperform rating

The Galaxy Resources Limited (ASX: GXY) share price was a solid performer on Tuesday, rising almost 1.5% to $2.29.

Despite this gain, the lithium miner’s shares have lost almost half their value since this time last year.

Why did the Galaxy share price climb higher?

As well as gaining a boost from improving investor sentiment, Galaxy’s shares were given a lift from a positive broker note out of the Macquarie Group Ltd (ASX: MQG) equities desk.

According to the note, the broker has cut its price target down to $2.70 from $3.00 but upgraded the rating on its shares to outperform from neutral.

Despite the price target cut, it still implies potential upside of 18% for its shares over the next 12 months.

Macquarie made the move after a recent update by Pilbara Minerals Ltd (ASX: PLS) revealed that it had experienced increasing demand for its lithium.

This led to the miner signing a memorandum of understand with South Korean conglomerate POSCO to consider a larger jointly owned chemical conversion facility to produce industry leading, high-grade hydroxide and carbonate products.

The two companies had previous agreed on a 30ktpa facility but will now consider increasing it by a third to 40ktpa.

While Pilbara Minerals remains the broker’s favourite, it sees value in Galaxy’s shares at these levels and considers them a buy.

Macquarie estimates earnings per share of 3.3 cents in FY 2019 and 12.3 cents in FY 2020 for Galaxy. Which means they are currently changing hands at a little over 18x estimated FY 2020 earnings.

Should you invest?

If lithium prices remain favourable then I think Galaxy, Pilbara Minerals, Kidman Resources Ltd (ASX: KDR), and Orocobre Limited (ASX: ORE) could all prove to be good investments.

However, the outlook for lithium is extremely uncertain due to concerns over increasing supply and slowing demand growth.

I would suggest investors wait for their respective half year results next month and see how they are faring in FY 2019 before investing.

Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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