Value Line has initiated coverage of LSB Industries, Inc. (LXU) in its flagship product, The Value Line Investment Survey. The company was formed in 1968 and is a diversified holding company involved in manufacturing, marketing, and engineering operations. LSB’s principal business activities are the manufacture and sale of chemical products for agriculture, industrial, mining, quarry, and construction uses, as well as the manufacture and sale of a broad range of heating, ventilation and air conditioning (HVAC) products, used in commercial, institutional, and residential buildings. Remaining revenue comes from the Engineered Products unit, which markets a proprietary line of precision metal working machine tools and industrial performance solutions to customers worldwide. The company employs roughly 1,900 people.

The Chemical business (63% of 2012 sales) produces nitrogen based fertilizers, which are used to grow food crops, biofuel feedstock crops, pasture land for grazing livestock, and forage production. Its industrial acids are used to produce a variety of goods, from clothing and paper products to advanced athletic gear. This unit supplies some of the world’s leading chemical and industrial companies and by focusing on specific geographic areas, LSB has developed freight and distribution advantages over many of its competitors. 

Agricultural products represent around 45% of the Chemical business’ revenue. Sales to customers of this segment primarily include farmers, ranchers, fertilizer dealers and distributors, primarily in the ranch land and grain production markets in the U.S. To help mitigate volatility in agricultural products, LSB also pursues a strategy of developing industrial and mining customers that purchase substantial quantities of products, including contractual obligations to purchase minimum quantities and pricing arrangements that provide for the pass through of raw material and other manufacturing costs. 

Overall, competition in the Chemical business is based on service, price, location of production and distribution sites, product quality, and performance. As part of the value-added services offered to certain customers, LSB also provides inventory management. Competitors include companies such as Agrium (AGU), CF Industries (CF), Coffeyville Resources, Dyno Nobel, Koch, Potash Corporation of Saskatchewan (POT), and Yara International (YARIY).

The Climate Control business (35% of 2012 sales) is a leading North American provider of geothermal and water source heat pumps (over 60% of the unit’s sales) and hydronic fan coils (over 20%). The unit also provides geothermal and modular chillers, custom air handlers, and executes large scale geothermal installations. Products are targeted to commercial, institutional, and residential buildings and are installed in some of the most recognizable commercial/institutional developments in the U.S., including the Prudential Tower, Rockefeller Plaza, Trump Tower, Time Warner Center, and many others. LSB’s highly flexible production capabilities allow it to custom design units for new construction as well as the retrofit and replacement markets. Most climate control customers place their product orders well in advance of required delivery dates, and typically cancellations are very low. 

Geothermal systems, which circulate water or a combination of water and antifreeze through an underground heat exchanger, are considered to be the most energy efficient systems currently available in the market. As a result, the energy efficiency and longer life of geothermal systems, as compared with other systems, as well as tax incentives that are available for installations, ought to lead to increased demand for these products.  

Water source heat pumps are highly efficient heating and cooling products, which enable individual room climate control through the transfer of heat using a water pipe system connected to a centralized cooling tower or heat injector. These products enjoy a broad range of commercial/institutional applications, particularly in medium to large sized buildings with many small, individually controlled spaces. Consequently, demand should also grow here, in both new construction and replacements.  

Hydronic fan coils use heated or chilled water provided by a centralized chiller and/or boiler, through a water pipe system, to condition the air and allow individual room control. Hydronic fan coil systems are quieter, have longer lives and lower maintenance costs than other comparable systems where individual room control is required. In this market, LSB focuses on the breadth of its products and customization capabilities. Hydronic fan coils enjoy a broad range of commercial/institutional applications, particularly in medium to large sized buildings with many small, individually controlled spaces.

The Climate Control business competes with companies such as Carrier, Trane, Nortek (NTK), McQuay, and Bosch, some of whom are also customers. Relative to peers, LSB believes that it manufactures a broader line of geothermal and water source heat pump and fan coil products than any other manufacturer in the U.S. and is competitive with price, service, warranty, and product performance.

Altogether, the company is subject to numerous environmental laws, as well as other federal, state, and local laws regarding health and safety matters, particularly in the Chemical business. Further, the company can be affected by cyclical factors such as inflation, global energy policy and costs, global market conditions, and economic downturns in specific industries (i.e. agriculture, mining, automotive and housing). The age of facilities in the Chemical business could also pose a problem, despite continuing investments to upgrade and replace equipment. Its nondiversified customer base raises concerns, too. In 2012, six customers accounted for 53% of sales in the Chemical business (33% of overall sales), and one customer in the Climate Control unit represented 18% of sales (6% overall).

Subscribers interested in learning more about this diversified business are advised to consult Value Line’s quarterly reports for LSB Industries, as well as any supplemental reports and relevant articles that may arise as important news comes to light.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.