Transformative Turnaround And Strategic Expansion Spark Prospects For Long-term Growth

Key Takeaways

• Major turnaround and expansion at key facilities are set to enhance production volume and improve revenue through better sales volumes and product mix.
  
• Progress in low-carbon ammonia projects and robust industrial market demand may stabilize earnings and support long-term financial growth.
  
• Significant execution risks and global economic volatility could impact LSB Industries' profitability and stability, particularly concerning expansion plans, pricing, and contract negotiations.

Catalysts

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

• Completion of a major turnaround at the Pryor facility is expected to lead to greater reliability and increased production volume, potentially boosting revenue through higher sales volumes.
  
• Expansion of the Pryor urea plant should allow LSB Industries to produce an incremental 75,000 tons per year of UAN, possibly enhancing revenue and profitability as volumes increase and product mix improves.
  
• Construction of additional nitric acid storage at the El Dorado facility is anticipated to optimize sales mix and improve margins by allowing for better inventory management and response to market demands.
  
• Ongoing resilience in U.S. industrial markets and anticipated increases in demand for nitric acid due to economic factors and easing interest rates could stabilize earnings and contribute to revenue growth.
  
• Progress in low-carbon ammonia projects, with potential full-scale operation expected in the late 2020s, could open new markets and revenue streams, supporting long-term earnings growth and strengthening financial performance.

LSB Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LSB Industries's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.0% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $81.6 million (and earnings per share of $1.14) by about November 2027, up from $-15.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2027 earnings, up from -39.4x today. This future PE is lower than the current PE for the US Chemicals industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

LSB Industries Future Earnings Per Share Growth

Risks

• There is significant execution risk associated with LSB Industries' ambitious expansion plans, such as the Houston Ship Channel low-carbon ammonia project. Delays or cost overruns in these projects could impact profitability and cash flow.
  
• Potential global economic volatility, including geopolitical issues and fluctuating interest rates, could affect the demand and pricing of LSB’s products, thus impacting revenue and earnings.
  
• Dependence on successful contract negotiations for low-carbon ammonia sales poses a risk. Failure to secure long-term offtake agreements could expose the company to commodity price fluctuations, impacting earnings stability.
  
• The company’s reliance on favorable nitrogen price dynamics, which are subject to global supply constraints and natural gas costs, introduces uncertainty. Any negative shifts in these dynamics could affect revenue and net margins.
  
• Planned maintenance turnarounds for 2024 and 2025 may lead to production disruptions and additional expenses. These operational expenses could negatively impact net margins and earnings during those periods.

Valuation

• The analysts have a consensus price target of $10.5 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 2027, revenues will be $608.9 million, earnings will come to $81.6 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $8.56, the analyst's price target of $10.5 is 18.5% 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.