Why Pilbara Minerals isn't selling off despite 86% profit decline

What a difference a year can make – Pilbara Minerals (ASX: PLS) reported an underlying net profit of $318 million for FY24, down 86% compared to FY23.

It's easy to interpret the numbers at face value – A sharp year-on-year decline that should drive the stock sharply lower.

But contrary to the weak numbers, the stock is hovering around breakeven on Monday. Below, we'll explore some of the factors supporting the stock's performance in the face of such challenging results.

FY24 results summary

• Production up 17% to 725,300 tonnes

• Realised spodumene price down 74% to $1,176 a tonne

• Revenue down 69% to $1.25 billion

• EBITDA margin down 3,900 bps to 43%

• EBITDA down 84% to $538 million

• Underlying profit after tax down 86% to $318 million

• Cash balance down 51% to $1.62 billion

• New $1 billion debt facility to replace existing debt facilities

Weaker-than-expected earnings

Interestingly, the already weak numbers missed analyst expectations.

Citi (as of 24 July 2024) was expecting Pilbara Minerals to report FY24 production of 725,000 tonnes at realised prices of US$1,183 a tonne to generate $556 million in EBITDA.

While production was in-line with Citi estimates, realised prices and EBITDA missed by 0.6% and 3.2% respectively.

Why is the stock holding up?

#1 Proxy for lithium prices: Pilbara Minerals is very much a proxy for lithium prices. The stock is down around 35% from March highs and down 23% year-to-date. Much of today's result has already been reflected in the share price.

#2 Positioning: Analyst ratings and target prices are fairly mixed. As of July 25, a survey of 20 sell-side ratings revealed a split opinion: 40% had a "Buy", 35% a "Hold", and 25% a "Sell". This mixed outlook works in the company's favour. Had there been a unanimous "Buy" consensus before the earnings miss, we might have witnessed a dramatic downward revision in both earnings forecasts and share price targets. The lack of consensus means that the disappointing results were likely already factored into some analysts' projects.

A good example of this is Megaport (bullish consensus, earnings miss and shares down 21% on reporting date) and Corporate Travel (mixed consensus, shares down 40% year-to-date, poor earnings but shares finished almost breakeven on results day).

#3 Short interest: Pilbara Minerals is the most shorted stock on the ASX and by a wide margin. As of 20 August, short interest for the stock sat at 21.4%. As CEO Dale Henderson explained last year, "There appears to be a component of the market that wants to short lithium pricing and given that there’s no available mechanism to do that, they have gravitated, it would appear, to Pilbara as a proxy for the lithium market because of our scale, pure-play exposure and our liquidity."

Why does short interest matter? Picture these two scenarios:

• Scenario one – The FY24 result smashes market expectations, sending PLS shares much higher. This would force some short covering, which would push the share price higher

• Scenario two – PLS reports an abysmal FY24 result and the stock gaps down. The gap down would also see some short covering (or in this case profit taking). As shorters buy back their shares, this also pushes the share price higher.

In some ways, the stock's high short interest protects it from company-specific shocks, both good and bad.

#4 Operational excellence: Pilbara Minerals is making the most out of everything it can control. The company reported its June quarter and full-year production figures last month and the numbers were a beat on all production metrics alongside positive cash margins. As Citi analysts put it: "PLS is the best in class operationally, has a cash buffer ... a growth story and a project that should generate cash through the cycle." While the company's earnings profile is currently pretty flat, it's faring much better than its peers.