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Release the Kraken! Activist Investors May Finally Unlock the Hidden Value at LSB Industries

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July 28, 2014 – Comments (5) | RELATED TICKERS: LXU

I love companies that are undervalues on a sum-of-the-parts basis.  I absolutely gobble up investment cases that I come across that talk about companies' SOTP valuations (this acronym seems to be much more widely used abroad than it is here in the U.S. for some reason).  The problem with investing in companies just because they are undervalued like this that they can often stay like this for a loooooong time.  That's why I look for undervalued companies that have some sort of catalyst that will help to unlock that hidden value.  The entrance of a successful activist investor into the picture can be one such catalyst.  That's exactly what's happening with a company that I invested in both in real-life and in CAPS back in April called LSB Industries (LXU).  At the time I made the following brief statement next to my pick here: "The activist firm Starboard finally got its people onto the board at LSB. This is a bet that they will make changes that will continue to improve its share price."

Release the Kraken!

LSB is a mini-conglomerate that has two main yet completely unrelated business segments, chemicals (mainly fertilizer) and climate control.  The thesis here is that Starboard will unlock value by convincing LSB to split up its two divisions, which currently trade at a discount to independent peers. Additional value could be unlocked by the conversion of the fertilizer assets into a more tax-efficient MLP, which yield-hungry investors are gobbling up and paying high multiples for.

Barron's excellent small cap column did a great write-up on LSB in this week's issue. The column has actually featured a number of companies that I own there recently, which means that I'm either on the right track and am about to unleash some serious outperformance on Mr. Market in the coming months and years, or that we're both idiots :). At least I have some great confirmation bias.

SIZING UP SMALL CAPS

A Mini-Conglomerate With Huge Upside

Activists have been agitating for a breakup of the small conglomerate, which makes fertilizers.


http://online.barrons.com/news/articles/SB500014240531119047...

In addition to my original reasons for buying he stock that I mentioned earlier, the column talks about the plant expansion that LSB's chemical division is undertaking and how it should help it to significantly improve its results going forward. The article also provides more of a timeline for when a breakup of the company could potentially happen, looking at its debt maturities.

An analyst from Avondale Partners who is quoted in the article sees 60% to 100% upside in the stock if some of the initiatives hat I mentioned are taken. Even if they take a year or two to unfold, he sees 15% upside in LSB over the next year as a result of operational improvements.

I already own an average size position in LSB and I will likely add to it at one point in the future. Of course, the good old Barron's pop has caused LXU to rise 8% already today.  Hopefully it comes back to Earth so that I can add to my position in the future before these corporate actions take place.

Thanks for reading everyone.  Have a great day!

Jason

5 Comments – Post Your Own

#1) On July 28, 2014 at 10:29 AM, boozalex (33.98) wrote:

I was disappointed to see the article.  I was hoping for a print of $35 before the article.  

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#2) On July 28, 2014 at 10:51 AM, TMFDeej (99.24) wrote:

I knew that you liked this one booxalex.  I know what you mean, but the pop has already faded some and none of these catalysts are immediate.  They will likely take a year or two to materialize.  Most of the people who are piling in after the article probably won't have the patience to wait that long. 

Jason

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#3) On July 29, 2014 at 6:25 AM, JeffryClarke (27.84) wrote:

I debated between LXU and IP and then bought IP.  I really like LXU but it seemed to me that maybe nothing will happen until next year - maybe even late next year.  I haven't seen the Barron's article or read any research.  Could they really convert to an MLP during the big cap ex surge that they're about to undertake?

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#4) On July 29, 2014 at 9:34 AM, TMFDeej (99.24) wrote:

Hey Jeffry.  Good to hear from you.  When did you buy IP, before or after the announcement that paper companies may try to spin off their plants into MLPs?  I wonder if it is going to really happen.  Passport proposed the idea and owns stakes in IP, RKT and KS, but it remains to be seen if the IRS will allow it.  Given the fact that limiting the conversion to plants that only have a maximum of 25% of their capacity in recycled material it actually looks like it discourages recycling.  It would be a pretty dumb move for the government to incentivise companies not to recycle, but who knows. 

Did you see Windstream this morning?  If a telecom can convert its land line assets into a REIT then I suppose anything is possible.  What a move?

I'd love to hear your thoughts on the IP investment if you have a chance.

I think that LXU will have most of its capital spending in the rearview mirror by the time a MLP conversion actually happens.

Jason

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#5) On July 29, 2014 at 7:21 PM, JeffryClarke (27.84) wrote:

I actually wrote a blog on IP - summary is a I like it with or without the MLP.  The comments today from IP management were neutral to bearish on the MLP possibilities.  I worked on something very similar when I was at American Airlines and it's not easy.  I'm not sure how they'd get around taxes on the transaction, for instance (and the asset step-up does you no good at an MLP).  They would also need to put all sorts of contracts in place between the MLP and the 'new parent.'  So, seems like the market's skepicism is warranted.  But I still like it.

So, LXU - you're assuming it happens in 2016 then? 

 

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