Improved Production And Low-Carbon Projects Will Secure Bright Future

Key Takeaways

• Strategic shift to more cost-plus contracts aims to stabilize margins and reduce earnings volatility from natural gas price changes.
  
• Delaying capital-intensive projects improves capital allocation, allowing future investment in higher-margin projects or shareholder returns to support earnings.
  
• Tariffs, equipment delays, and natural gas costs pose challenges, while cost-plus contracts stabilize earnings but limit potential upside in high price scenarios.

Catalysts

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

• LSB Industries anticipates continued improvement in production efficiency and sales volumes, particularly for ammonia and its derivatives, which is expected to drive revenue growth throughout 2025.
  
• The company's strategic shift to increase the proportion of cost-plus contracts from 30% to an expected 35% by the end of 2025 is designed to stabilize margins and reduce earnings volatility related to natural gas price fluctuations.
  
• With robust demand and pricing for products like UAN and ammonium nitrate driven by increased U.S. corn planting, the company is well-positioned to capitalize on a favorable pricing environment, positively impacting revenue and margins.
  
• The El Dorado facility's decarbonization project, which includes precertification under the Verified Ammonia Carbon Intensity Program, positions LSB to potentially increase sales through low-carbon ammonia offerings, enhancing future revenue and competitive positioning.
  
• LSB's decision to delay capital-intensive projects, like the Houston Ship Channel project, allows for improved capital allocation, potentially leading to future investments in higher-margin projects or shareholder returns, thereby supporting earnings growth.

LSB Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LSB Industries's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.7% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $47.0 million (and earnings per share of $0.49) by about May 2028, up from $-19.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $52 million in earnings, and the most bearish expecting $42 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from -22.6x today. This future PE is greater than the current PE for the US Chemicals industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.19%, as per the Simply Wall St company report.

LSB Industries Future Earnings Per Share Growth

Risks

• U.S. tariffs and potential retaliatory actions introduce uncertainty, which could impede LSB's future planned spending and capital projects, likely affecting net margins and earnings stability.
  
• Delays in equipment delivery for scheduled plant turnarounds and potential capital project cost increases due to tariffs may hinder operational efficiency enhancements, potentially impacting revenue and EBITDA growth.
  
• The pause of the Houston Ship Channel project due to capital cost uncertainties and slower low-carbon ammonia demand ramp-up may limit LSB's growth prospects and potential revenue streams from low-carbon initiatives.
  
• Higher natural gas costs have negatively impacted adjusted EBITDA, and future gas price volatility could further challenge margin stability and earnings predictability.
  
• The shift towards cost-plus contracts aims to stabilize earnings but might also limit potential upside during high fertilizer price spikes, potentially affecting net margins and longer-term financial performance.

Valuation

• The analysts have a consensus price target of $9.833 for LSB Industries based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $623.2 million, earnings will come to $47.0 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $6.08, the analyst price target of $9.83 is 38.2% higher.
  
• 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.