LSB Industries, Inc. reported financial results for the quarter ended March 31, 2020 largely in line with expectations for strong sales volumes and depressed selling prices. After some consternation about the spring agricultural fertilizer application season, product demand accelerated through the end of the quarter. Sales volumes in LSB’s industrial and mining segments experienced late-quarter weakness as customer demand tempered due to the COVID-19 pandemic – a dynamic that will likely be more pronounced in FQ2 2020. The quarter was highlighted by strong operating performance as each of LSB’s three owned production facilities demonstrated high on-stream rates and there was no reported unplanned downtime. Considering that FY 2020 earnings will likely not reflect mid-cycle pricing and a normal demand environment, a valuation based on Global Value Research Company’s estimated FY 2020 EBITDA of $82.1 million is inconsistent with the long-term earnings profile of the business. Analysis of LSB’s financial characteristics in a normalized environment suggests EBITDA of $120 million is reasonable; upside from the materialization of identified organic sales growth opportunities is not considered in this number as these cannot be reliably quantified. Therefore, Global Value Research Company assigns a target price of $13.40, representing 9.0x normalized mid-cycle EBITDA of $120 million.
