3 ASX 200 lithium shares brokers just upgraded to 'buy'

Brokers believe the fairytale run for ASX lithium shares is not over yet for these three companies.

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.

Published January 11, 2023 1:28 pm AEDT

The Australian share market is full steam ahead on Wednesday as the materials sector carries the S&P/ASX 200 Index (ASX: XJO) 0.72% higher. Some of the names heavily aiding in today's rally are ASX lithium shares.

It appears enthusiasm has returned to a number of popular lithium-producing companies today amid several positive broker ratings. Investors are potentially breathing a collective sigh of relief — at least temporarily — following a tough month for future lithium expectations.

busy trader on the phone in front of board depicting asx share price risers and fallers — Image source: Getty Images

Is it time to buy these ASX 200 lithium shares?

Views are still mixed on what the future looks like for the electrifying commodity, lithium.

Last month, Goldman Sachs shared its belief that lithium prices will begin to disintegrate this year as additional supply hits the market. Meanwhile, other brokers — such as those at Macquarie — are forecasting a sparkling future for the lithium price based on a continued supply shortfall.

Any company that produces a commodity is largely influenced by the price of said commodity. Based on this, Jefferies and Citi must be expecting positive trends for the lightweight metal over the next 12 months based on their latest buy ratings.

Today, analysts at Jefferies have labelled Allkem Ltd (ASX: AKE) and IGO Ltd (ASX: IGO) as buys. Likewise, Citi is optimistic about the road ahead for Pilbara Minerals Ltd (ASX: PLS), assigning this ASX 200 lithium share a buy as well.

Investors are responding with strong buying pressure for these extremely profitable lithium companies. At the time of writing, shares in Allkem, IGO, and Pilbara Minerals are up 5.4%, 4.1%, and 3.8% respectively.

The all-important question is: Will the profits continue to grow to justify the valuations? At the extreme, IGO shares are now trading on a price-to-earnings (P/E) ratio of approximately 32 times. Whereas, the Australian metals and mining industry average hovers around 12 times.

Out of the three ASX 200 lithium shares rated, Allkem trades on the lowest earnings multiple at 17 times. At the same time, the $7.9 billion lithium producer also holds the lowest historical annual earnings growth rate of the three at 23%.

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