LSB Industries, Inc.: The heat is on

Rating:

“Don’t use up all the hot water!”

If you’ve ever uttered this, and many of us have while impatiently waiting to shower in the mornings, then your torrid water saviour might well be LSB Industries, Inc. (AMEX: LXU), formed in 1968.

The Oklahoma City-based small cap has two core businesses: chemicals and indoor climate control, but the key to the company’s growth are water source heat pumps (WSHP) and renewable energy geothermal heat pumps (GSP). Sales of these pumps surged 58% to $134 million in 2006 from 2005 and so far in the first nine months of 2007 have grown 30% from 2006 levels.

WSHP's are conventional cooling and heating units connected to a central HVAC system with a cooling tower and small boiler. They help move heat from zone to zone in a building and reduce both energy use and cost. LSB has a 43% U.S. market share for this pump.

Revenues for LSB Industries are split almost equally between the chemicals and indoor climate control segments: For the latter, LSB targets specialized niches of HVAC (Heating, Ventilating and Air Conditioning) building systems. The company enjoys a 41% U.S. market share in hydronic fans coils (air-handling units used in large commercial buildings). Its installed base of three million units includes placements in such New York City landmarks as Rockefeller Center and the Trump Tower.

In May 2007, Business Week named LSB one of its 100 hottest growth companies. The next month, the shares were added to the Russell 2000 and 3000 indices, making LXU a "must-have" stock for funds that track these indices.

With a growing emphasis on green energy, LSB is the nation's leading geothermal heat pump supplier with a 43% market share. Roughly 3/4 of the energy budget for a single-family house is consumed by heating, air conditioning and generating hot water. A geothermal HVAC system replaces a conventional source such as a natural gas furnace and dramatically reduces heating costs since the earth provides "free" energy.

Geothermal makes use of the fact that the earth absorbs roughly half of all solar energy: in a geothermally heated home, underground loops are installed below the surface, filled with water and sealed. In winter, water inside the loops absorbs heat from the earth, is compressed, moved to a central unit and sent out to the house as warm air. The opposite occurs in summer. The system saves roughly half compared to a standard natural gas furnace and although geothermal is more expensive to install than conventional systems, the payback period is estimated by LSB to be three years. Aside from use in residential homes, Geothermal can also be used in commercial structures.

Barry Golsen, vice chairman and president of LSB says that the yearly HVAC market in the United States is about six million units.

"Right now there are only about 40,000 units that are geothermal,” Golsen says. “That's less than 50%."  His conclusion: there is "enormous upside potential."

In additional to indoor climate control products, LSB runs a chemical division. While the chemical business is a source of modest profits, it is relatively slow growing. For the first nine months of 2006, the small cap recorded sales of $201.4 million; this amount increased to only $222.4 million for the comparable period of 2007.

LSB is the leading marketer of concentrated nitric acid in the United States, a product used to create flame-resistant fibres. It also produces sulphuric acid employed in pulp and paper manufacturing and metals processing. Customers include such blue-chip firms as International Paper Company (NYSE: IP) and E.I. du Pont de Nemours & Company (NYSE: DD).

Thanks largely to its climate-control products, LSB has shown excellent top and bottom-line growth. For the first nine months of 2007, LXU's sales zoomed to $451.8 million from $368.2 million, an increase of 23%. Profits of $42.3 million were an incredible 231% ahead of 2006's comparable figure of $12.8 million.

Wall Street has noticed. The stock opened for trading in January 2007 under $12 and reached a high of $28.85 on Nov. 5th. It has since pulled back to the low 20s, but that gain still represents nearly a double. Despite this advance, the shares are fairly priced. LSB has a price-to-sales ratio of just over 0.8. A price-to-sales ratio below 1 is thought of as reasonable. The trailing P/E ratio is 12.3, which seems downright cheap for a stock whose earnings have nearly doubled thus far in 2007. LSB has a solid balance sheet with a moderate debt to equity ratio (1.41:1) and nearly doubled its shareholder's equity in the past nine months.

From a technical analysis perspective, the stock is in a very strong uptrend. A long-term trend-line drawn from the late 2006 low of $4.84 currently intersects the chart near $19.50. As long as LSB stays above that threshold, the chart is healthy.

While LXU's story is positive, there are, of course, risks. The company is exposed to the slowing housing market. A recession would reduce the demand for its specialty chemicals. Still, LSB Industries (LXU) presents an intriguing combination of solid earnings, reasonable valuation and growth based on the geothermal bandwagon.

About the Author
Melvin bought his first stock, IBM, when he was a teenager in 1962. Since then he has taught college-level stock market courses and instructed investors in seminars presented at brokerage firm T.D. Waterhouse. Read More

Rate This Article:
(click a star)

Enter comment:

 Free registration required