Low-carbon Ammonia Advances Will Spark Global Agricultural Demand

Key Takeaways

• Rising demand, cost-plus contracts, and advances in low-carbon ammonia position the company for higher, more stable margins and increased pricing power in core markets.
  
• Operational efficiencies, debt reduction, and strong liquidity could enable significant shareholder returns through enhanced cash flow and potential buybacks or dividends.
  
• Heavy reliance on volatile natural gas prices, regulatory pressures, and shifting industry trends could constrain margins, revenue growth, and future cash flow.

Catalysts

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

• Analyst consensus expects margin stabilization from shifting to cost-plus contracts, but with cost-plus now encompassing a growing share of higher-margin industrial products and continued conversion of spot sales to contractual, LSB can drive structurally higher margins and earnings visibility than currently modeled, especially as industrial demand accelerates in tandem with ongoing U.S. onshoring.
  
• Analysts broadly agree on production efficiency gains, yet ongoing multi-year reliability initiatives and targeted cost-efficiency programs-projected to yield $15-20 million in annual savings-could push plant utilization and profitability beyond expectations, enabling sustained EBITDA growth through 2027 as operational costs trend materially lower.
  
• LSB is positioned to reap outsized revenue gains from accelerating global food production needs and persistently elevated corn acreage in the U.S., as the structural shortage in global ammonia and nitrogen supply-exacerbated by geopolitical disruptions and trade realignments-supports long-term pricing power across the cycle.
  
• The company's advanced progress developing low-carbon ammonia at El Dorado places it squarely at the forefront of premium-priced, ESG-driven chemical markets, capturing new high-margin revenue streams as global sustainability mandates and regulatory support intensify for green fertilizers in both agriculture and industrial sectors.
  
• Steady debt reduction and a strong liquidity position are setting the stage for a potential step-change in shareholder returns-once major capex spends taper off, free cash flow could accelerate rapidly, enabling aggressive share buybacks or special dividends and boosting EPS well beyond consensus forecasts.

LSB Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on LSB Industries compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming LSB Industries's revenue will grow by 6.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.2% today to 8.4% in 3 years time.
• The bullish analysts expect earnings to reach $54.1 million (and earnings per share of $0.71) by about August 2028, up from $-33.2 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 bullish analyst cohort, the company would need to trade at a PE ratio of 25.9x on those 2028 earnings, up from -16.1x today. This future PE is greater than the current PE for the US Chemicals industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.04%, as per the Simply Wall St company report.

LSB Industries Future Earnings Per Share Growth

Risks

• LSB Industries remains heavily reliant on natural gas as a feedstock, as evidenced by EBITDA being offset by materially higher natural gas costs in the most recent quarter, indicating that sustained or volatile energy prices could erode future net margins and compress earnings.
  
• The company's business model remains linked to nitrogen fertilizers and ammonia, which face long-term headwinds from global decarbonization and the move toward net-zero, potentially shrinking demand and limiting growth in revenues over time.
  
• LSB's exposure to agricultural cycles and row crop acreage, particularly corn, makes it vulnerable to long-term stagnation or decline driven by advances in alternative proteins, sustainable agriculture, and farmer hesitancy caused by deteriorating crop economics, negatively impacting sales volumes and baseline revenues.
  
• High capital intensity and ongoing plant upgrades-while necessary for operational efficiency-raise the risk that further investment will be needed to address regulatory pressures and ESG compliance, increasing maintenance capex, operating costs, and putting pressure on future free cash flow generation.
  
• The industrial and fertilizer chemicals industry is susceptible to long-term pricing power headwinds from global overcapacity and subsidized competition, particularly from new entrants in the Middle East and China, which could result in lower realized selling prices and subdued revenue growth for LSB.

Valuation

• The assumed bullish price target for LSB Industries is $15.0, which is the highest 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 bullish 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 $8.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $642.2 million, earnings will come to $54.1 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $7.4, the bullish analyst price target of $15.0 is 50.7% 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.