Decarbonization And Oversupply Will Erode Traditional Fertilizer Demand

Key Takeaways

• Global decarbonization and new green technologies will gradually erode demand and pricing power for traditional ammonia and nitrogen-based fertilizers.
  
• Increased regulatory scrutiny and competition from both new entrants and alternative technologies will further squeeze margins and diminish long-term growth prospects.
  
• Enhanced operational efficiency, decarbonization progress, and a greater mix of stable industrial contracts position LSB for resilient margins and sustainable long-term growth.

Catalysts

Engages in the manufacture, marketing, and sale of chemical products in the United States.

• The acceleration of global decarbonization policies and rapid adoption of green technologies will gradually shrink the demand for traditional, fossil fuel-derived ammonia and nitrogen-based fertilizers, directly reducing LSB Industries’ long-term revenue growth and pricing power as core ag markets transition to more sustainable alternatives.
  
• Intensifying global regulatory scrutiny on carbon emissions, including carbon pricing and stricter standards for chemical production, is likely to drive up LSB’s operating costs substantially, eroding net margins and making the company less competitive relative to early adopters of advanced clean ammonia technologies.
  
• Ongoing reliance on legacy natural gas-dependent production processes exposes LSB to continued input cost volatility and margin compression, particularly if natural gas prices rise or if carbon costs are imposed, further pressuring earnings and limiting free cash flow available for reinvestment or shareholder returns.
  
• Worldwide capacity expansions and new entrants in nitrogen-based fertilizers are contributing to oversupply and increasing commoditization, which will create persistent downward pressure on product pricing and revenues for established producers like LSB Industries, resulting in greater earnings volatility and weaker long-term EBITDA.
  
• Advances in precision agriculture, alternative soil enrichment, and the growing adoption of biological fertilizers will reduce farmer dependence on conventional chemical fertilizers, shrinking LSB’s total addressable market, decreasing baseline demand, and undermining both top-line revenue and future profit growth over time.

LSB Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LSB Industries compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LSB Industries's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.0% today to 6.3% in 3 years time.
• The bearish analysts expect earnings to reach $40.7 million (and earnings per share of $0.68) by about July 2028, up from $-26.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from -23.2x today. This future PE is lower than the current PE for the US Chemicals industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

LSB Industries Future Earnings Per Share Growth

Risks

• Continued strong global demand for fertilizer, driven by an increase in planted corn acres and robust commodity prices, is boosting LSB Industries’ sales volumes and supports higher revenue potential over the long term.
  
• The company is making measurable progress on its decarbonization efforts, including achieving pre-certification for low-carbon ammonia at its El Dorado facility, which positions LSB to benefit from regulatory and market trends favoring low-carbon products and could enhance future earnings growth.
  
• Ongoing investments in plant reliability and operational efficiency have resulted in improved production, increased volumes, and the ability to upgrade into higher-margin products, which is likely to support EBITDA margin expansion and greater free cash flow.
  
• A growing proportion of sales are under cost-plus industrial contracts, expected to reach 35% by year-end with a long-term target of up to 50%, which reduces earnings volatility, increases stability, and fortifies net margin resilience amid input cost fluctuations.
  
• Strong balance sheet management, targeted deleveraging, and disciplined capital allocation (with flexibility around capex, buybacks, or debt reduction) provide LSB with the capacity to both withstand industry cycles and reinvest for sustainable revenue and profit growth.

Valuation

• The assumed bearish price target for LSB Industries is $6.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LSB Industries's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $6.9.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $640.7 million, earnings will come to $40.7 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $8.6, the bearish analyst price target of $6.9 is 24.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.