LSB Industries, Inc. (“LSB”) reported financial results for the quarter ended March 31, 2019 (FQ1 2019) that reflected a continued trend of strong operational reliability. Financial results were mixed: weak seasonal demand led to low agricultural sales volumes, which was offset by firming prices for agricultural products, while strong volumes in the industrial and mining segments were offset by price declines. Expense discipline led to positive operating income for the period. The average on-stream rate of 93% across LSB’s three owned production facilities during the period was encouraging. FQ1 2019 is the third consecutive quarter in which each of LSB’s facilities reported high on-stream rates, which is a testament to the efficacy of programs implemented by management over the past several quarters. Although seasonal weakness weighed on results, LSB’s fundamental operating and financial characteristics continue to improve. Supply dynamics and outlooks for LSB’s agriculture and industrial segments are encouraging, and LSB is well-positioned to increase sales by capitalizing on new commercial opportunities, which will increase plant utilization. Firm long-term product prices are supported by cyclical trends, although short-term price fluctuations may occur. For these reasons, the company’s valuation on the basis of both its tangible book value (TBV) and a range of earning-based measurements are attractive relative to the current stock price of $5.15. While the company’s long-term value lies in its ability to produce consistent cash flow, GVRC assesses LSB’s TBV of approximately $10.17 as a conservative valuation metric that provides a margin of safety until such time as the company is able to generate consistent earnings. GVRC applies a modest 1.25x multiple to TBV to arrive at a target price of $12.70, and notes the substantial upside to this target price due to an expectation of future earnings improvements.
