LSB Industries: Smallcap Fertilizer Pick

Jun.20.08 | About: LSB Industries, (LXU)

I have recently praised companies such as Monsanto (NYSE:MON), Potash (NYSE:POT) and Intrepid Potash (NYSE:IPI) as I believe these stocks are under priced in the current environment. Most of the seed and fertilizer plays look good going forward. When you look at trends, especially with respect to commodity pricing, there can be very large runs and declines. Cyclical stocks can make you a mint, but you can also lose the farm. If we go back to the oil drilling boom and bust of yesteryear, we see how painful you can get in at the top. I think you can still get into the fertilizer names based on my writing with respect to Monsanto. Yield is an important part of the equation and it is easily increased by the use of fertilizer. Even with major moves in price, fertilizer is still cheap due to how much more corn, soybeans, etc you can obtain by its use.

As I have highlighted most of the big players in this arena, I will be trying to find smaller companies that have access to this. These companies are compelling, not just through growth, but with larger companies looking for growth through acquisitions. LSB Industries (NYSE:LXU) has a $416 million dollar market cap and thus is speculative, but this also aids in growth with respect to the company. This company has lagged somewhat recently with respect to its residential exposure, but looks good on a long term basis. They provide components for air conditioning systems with respect to commercial and residential. They also have chemical exposure to mining, construction, industrial acid and agriculture.

This company has been on fire with respect to growth. They were recently listed on BusinessWeek's hot growth companies list. They were ranked 38th out of 50, from a base of 10000 publicly traded companies. This announcement was made June 3rd of 2008, and was the second year in a row of being placed on the list.

Valuation is what is the most appealing. It trades at a PE of 9.89. The current five year PEG is .96, and that is based on growth numbers I believe to be low for a company with fertilizer exposure. Over the past five years this company has grown 64.5% per year, but the next five years have growth estimated at 14.33% per year. This seems illogical based on last year's performance. When we compare 2007 to 2006, LXU has reported growth 19.2% with respect to net sales. They saw operating income jump 117.4%. Net income increased 202.2%. Diluted EPS jumped 142.1%. When looking over the year end report, we see that their climate control business sales increased much more than their chemical sales, but chemicals realized much better margins as associated with increasing prices of fertilizer and other nitrogen based products.

This stock recently pulled back, making it much more affordable. I do believe that this is a good place to buy. Due to the triple top breakout on June 9th, look for a bullish price objective of $27.50.

Disclosure: none