With a market cap of only $893 million, it's not like LSB Industries, Inc. (NYSE:LXU) is the kind of company that garners a ton of attention. On the other hand, over the past several months, LXU has garnered far more attention than it likely wanted. The turbulence seems to be mostly behind it, however, and though the stock is now overbought thanks to the proverbial clearing of the dust, for long-haul investors, LSB Industries may be worth a closer look.
LSB Industries, Inc. is a chemical company... mostly. The core of its revenue is driven by ammonia (fertilizer) sales, though its climate control (HVAC) division is doing respectable business as well.
That's not the interesting part of the LXU story, however.
Several months ago, a private equity group called Engine Capital delivered an in-no-uncertain-terms message to the company and its shareholders that it believed LSB's current management team wasn't delivering enough value to current shareholders. Engine proposed that the company sell or spinoff some of its assets, and convert its chemical business into an MLP, or master limited partnership - a format that focuses on delivering reliable income to shareholders by generating steady recurring revenue. LSB Industries was and is capable of supporting an MLP, though it didn't feel such a company structure [which are best utilized within the gas and oil industry] was the best way to deliver value to shareholders.
The usual board representation and proxy posturing ensued, eventually leading up to the entry of a new player on the field appearing a couple of months ago... hedge fund Starboard Value. While Starboard also aims to exert control over the company in an effort to unlock value, it wasn't and won't seek and MLP structure. Clearly aligned with the current management's philosophy, LXU paved the way for Starboard to take on a strong/controlling board presence as if yesterday, and Engine Capital - realizing it was fighting a losing battle - backed off. [This is the highly simplified version of the story, but in the interest of time....]
So what does any of this have to do with the merits of LXU as an investment? Nothing. That's the point. While the rhetoric since late last year has been solely about the pros and cons of becoming a master limited partnership, what has largely been obscured is the fact that two ammonia/chemical production facilities have been brought back online (one of them off and on a couple of times) again, with demand still on the rise. Indeed, should things pan out this year and next year as analysts predict, per-share earnings should be up 6.8% this year, and should be up a hefty 46% next year, and income growth moves back to its long-term mean.
Truth be told, LSB Industries still isn't an especially interesting company. It's an extremely reliable company, however, and despite a little earnings volatility stemming from the natural gas used to make ammonia and the typical volatility of the fertilizer business, the broad trend for earnings has been an upward-pointing one. Yes, LXU is just the kind of boring addition a lot of investors don't even realize they need... after a slight pullback, of course.
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