Tom Konrad CFA
Uncertainty surrounding the damage caused by a sulfur fire at LSB Industries‘ (NYSE:LXU) chemical facility Tuesday has brought the stock down $5 from Monday’s close, although the company was already well-valued and had just beaten analyst’s expectations for its first quarter results.
This is extremely short-sighted of investors, who are no doubt spooked by the lack of information about the extent of the damage. However, we have enough information to make a reasonable estimate as to the damage to LSB’s profits. As I outlined Tuesday night, we know:
- The facility is insured for both damages and work stoppage.
- The potential uninsured cost will amount to at most 13 cents a share, or less than $3 million.
- Only minor injuries were reported. Some workers were treated for high blood pressure and shock.
- There was no environmental release, so an EPA investigation is unlikely.
Even with the inevitable distraction of management time from other business, I find it hard to see how more than a $1 per share sell-off is justified. Yet the stock is down $5.
A Second Opinion
I follow LSB because of its geothermal heat pump business, which only accounts for about 1/3 of revenues. This business has been looking up, with breakthrough products recently introduced, and signs of a pick-up in demand. For the chemicals business, I rely on other analysts. They seem to agree with me.
BCMI Research analyst and biochemist Chris Damas CFA, gives an in-depth look at the fire with added perspective on the chemicals involved. He concludes:
I think the stock is a buy here, with the insurance proceeds covering the reconstruction of the nitric acid plant. There appears to have been no environmental release, with a long EPA action as a result.
The lost sales business during the busy growing season will no doubt cause a significant operating loss for the chemical segment next quarter. But LSB has business interruption insurance that kicks in after 30 days.
This morning, Northland Securities reiterated it’s ‘Outperform’ rating, and lowered their price target from $41 to $38.
Analysts were predicting $3.02 in earnings for 2012 before the explosion. If we reduce that to $2.89/share, we still have a forward P/E of 9.6. LSB has no net debt, and is poised for growth, both from a reviving HVAC business, and from growth in the chemicals business with an upgraded plant which was brought online in the first quarter. Analysts estimate 39% growth for the coming year, although some of that growth may be deferred (but not eliminated) because of the damage at the El Dorado facility.
Writing about this incident has side-tracked my plans to write about the leap in efficiency coming from both LSB and geothermal heat pump rival Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF), but it is providing a great buying opportunity. With uninsured losses (including work stoppage) capped below $3 million, it seems crazy that LSB has lost over $110 million in market cap over this incident.
Now is clearly the time to buy LSB, and, incidentally, Waterfurnace, which is also well valued and seeing a market turn-around.
Disclosure: Long LXU,WFI.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.