LSB Industries Expects Improved Operating Results
It has been said the banking industry is the grease that keeps the business world operating, but for manufacturers of physical products, it is the chemical industry that is the backbone for these manufacturers. Chemical companies' end products range from petrochemicals, industrial gases, synthetic dyes and pigments to many other organic and inorganic chemicals.
One of the leaders in the agricultural chemical space is LSB Industries Inc. (NYSE:LXU). The company manufactures and sells chemical products, including nitrogen-based fertilizers, such as ammonia, fertilizer grade ammonium nitrate and urea ammonia nitrate for fertilizer and fertilizer blends. These are primarily used in corn production as well as other crops.
On the industrial side of the business, it provides high purity and commercial-grade ammonia, ammonium nitrate, sulfuric acids, nitrating acids, carbon dioxide and diesel exhaust fluids. End markets include semiconductor manufacturing, pulp and paper, power plant emissions abatement, water treatment, refrigerants, metals processing and surface mining.
Roughly two-thirds of its revenue is generated from agricultural markets with the remaining third in industrial markets. Incorporated in 1968, the Oklahoma City-based company currently has a market capitalization of $748 million.
Market dynamics
According to the company, U.S.. corn prices remain above their 10-year average level and supply is expected to increase on a strong 2023 planting season. Fertilizer demand is expected to rise on greater food, seed and industrial usage, along with greater ethanol and export demand.
Nitrogen prices are expected to find support at or above current levels during the second half of the year. Ammonia inventories are high globally, but are gradually being worked down, which should improve pricing. The North American planting season is peaking with healthy fertilizer demand setting the stage for higher prices later this year.
On the industrial side of the business, demand remains steady for industrial products with global producers shifting production from international facilities to U.S. operations due to lower input costs There appears to be solid demand for mining products due to attractive market fundamentals for quarrying and aggregate production.
Financial review
The company reported first-quarter results on May 2. Revenue was negatively impacted by pricing issues despite strong volume growth, declining to $181 million from $199 million in the prior-year quarter. Net income declined to $16 million compared to $59 million in the year-ago period due to lower pricing and higher input costs. Adjusted earnings per share were 25 cents compared to 69 cents in the prior-year period. Operating cash flow was $59 million and capital expenditures came in at $18 million.
Total cash on the balance sheet was $426 million at the end of the quarter and total debt was $711 million. The company had $62 million in availability under its line of credit.
Ammonia was the largest revenue contributor at $63.4 million, while ammonium nitrate and nitric acid contributed $58.2 million. Urea ammonium nitrate contributed $46.6 million with other outputs generating $12.7 million.
The company does not currently pay a dividend, but was an active repurchaser of its own shares in 2022. The total amount of share repurchases was approximately $175 million.
In a statement, LSB President and CEO Mark Behrman said, We generated a healthy increase in sales volumes relative to the first quarter of last year. This improvement reflects the benefits of the reliability investments we made in our facilities in 2022 along with our successful commercial initiatives. However, the stronger volumes were more than offset by lower product selling prices resulting largely from a decline in natural gas prices in Europe, which reached all-time highs during 2022 and drove ammonia prices to record levels. After declining steadily for the past six months, we believe that prices for ammonia and related products are at or near a bottom, bolstered by the significant increase in fertilizer demand we've seen recently. We expect the pricing stabilization coupled with continued strong operating performance by our facilities to benefit our second quarter 2023 financial results."
Valuation
Financial results are expected to improve throughout the rest of 2023. Consensus analysts estimates for the year are 95 cents and $1 for 2024. Based on a forward-looking basis, the enterprise value/Ebitda estimate is only 5.5 times compared to between 7 and 8 times for the industry.
The GuruFocus DCF calculator creates a value of $13.60 when using $1 in earnings per share as the starting point and a conservative long-term growth rate of only 6%.
There are seven analysts that cover the company with an average price target of $13.86 with a high target of $18 and a low target of $10.
Guru trades
Gurus who have purchased LSB stock recently include First Eagle Investment (Trades, Portfolio) and Murray Stahl (Trades, Portfolio). An investor who has reduced his position is Chuck Royce (Trades, Portfolio).
Summary
LSB Industires believes it can generate substantial levels of Ebitda in this mid-cycle environment. After operating efficiencies, margin enhancement projects and de-bottlenecking efforts, it projects Ebitda levels could exceed $300 million by the 2026-27 time frame. That could be significant for a company with a current market capitalization of $748 million.
The stock could represent a solid small-cap investment for long-term value-oriented investors.
This article first appeared on GuruFocus.
