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Core Lithium share price has 25% upside: Macquarie

Imagine a future where Core Lithium is flowing cash. Macquarie thinks its not too far away.

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Mitchell Lawler
Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.
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Key points
  • The Core Lithium share price is 4.6% further into the dirt today, now trading at $1.03
  • Analysts at Macquarie are forecasting free cash flow in future years to prop up a $1.30 share price
  • The Core Lithium share price has outperformed its peers this year despite lacking profits

The Core Lithium Ltd (ASX: CXO) share price is failing to gain a footing this morning despite being in a broker's good books.

Shares in the lithium project developer are retreating 4.2% to $1.03, placing the company's share price 45% below its 52-week high. For comparison, the S&P/ASX 200 Index (ASX: XJO) is glowing red on Tuesday, slipping 0.6% to the downside.

Core Lithium shareholders might find solace in not being alone in their pain today. Many other ASX lithium shares such as Liontown Resources Ltd (ASX: LTR), Piedmont Lithium Inc (ASX: PLL), and Vulcan Energy Resources Ltd (ASX: VUL) are being tenderised on Tuesday.

However, if analysts at Macquarie are right, buying Core Lithium shares now could prove opportunistic.

A miner in a hardhat makes a sale on his tablet in the field.

Image source: Getty Images

Cash could soon be flowing

Core Lithium is a popular ASX lithium share among retail investors. Based on the latest data, approximately 72% of Core Lithium shares are held by the general public. Whereas, that figure is below 60% for even Aussie lithium stalwarts Pilbara Minerals Ltd (ASX: PLS) and Allkem Ltd (ASX: AKE).

The relatively low institutional ownership of Core Lithium could be a byproduct of its pre-revenue status. Right now, the company lacks cash-generating operations, which would probably drastically de-risk the investment case for institutions.

Though, the team at Macquarie believes this could change in FY2024 and FY2025. According to its latest note, the broker is pencilling in expectations for solid free cash flow by the previously mentioned financial years.

In light of its cash-producing forecasts, Macquarie has upped its rating on the Core Lithium share price to outperform. Accompanying the upgrade was a $1.30 price target for the lithium project developer — suggesting a potential 25% upside.

Comparing the Core Lithium share price

Despite the company's absence of earnings, the Core Lithium share price has outperformed its profitable peers in 2022. As shown below, the $1.9 billion company has gained 65% throughout the year, surpassing even the likes of Minerals Resources Ltd (ASX: MIN).

TradingView Chart

While once richly valued, the Pilbara Minerals price-to-earnings (P/E) ratio has grown reasonably in recent times. Currently, the lithium miner is priced at around 21 times earnings. For Core Lithium to trade a similar valuation, it would need to generate roughly $90 million in post-tax profits.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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