This Stock Dipped. Time to Buy More?

This article is part of our Rising Star Portfolios series.

The diversified small cap LSB Industries (NYSE: LXU  ) dropped 15% yesterday on the heels of its third-quarter earnings report. The Street is obviously disappointed with the earnings, but should it be? Let's take a look.

In two acts
LSB -- which I've purchased for my real-money, Rising Stars portfolio -- has two main business units, chemical (63% of year-to-date revenue) and climate control (36%). These units are further divided as shown in the pretty pie chart below:

Source: LSB Industries.

The past
The third quarter was a success by almost every measure. Sales were up 27% over the same period last year, and earnings per share rose 59%. Free cash flow is a bit harder to compare because of lumpiness, but is also growing well. The past 12 months have generated $34.2 million in free cash, compared with $9.3 million in 2010 and $28.6 million in 2009.

The only damper on the proceedings was a $1.4 million decrease in operating income from the climate control unit.

The future
Management also gave a pretty rosy outlook for the rest of the year, pointing to a few key factors. The company's urea and ammonium nitrate, or UAM, and ammonia plants are humming along nicely and have pre-sold most of their capacity for the fourth quarter. The severe drought in the South affected the timing of fall planting, and some of that will be pushed into the fourth quarter.

The conference call also brought up an interesting possibility for the future of the chemical business. There are currently three fertilizer master limited partnerships, or MLPs, on U.S. exchanges: Terra Nitrogen (NYSE: TNH  ) , CVR Partners (NYSE: UAN  ) , and Rentech Nitrogen Partners (NYSE: RNF  ) . An analyst noted on the call that they've all been well-received and trade for "pretty attractive multiples." (See fellow Fool Dan Dzombak's article for a great overview on the benefits of MLPs.) Might LSB consider that sort of structure for its chemical business? It seems it would unlock some value for shareholders.

President and COO Barry Golsen said the management team is open to that, but for now it's watching, waiting, and observing. Fairly noncommittal, but at least we know it's something the team is considering.

Bad reaction
So with a strong third quarter, guidance for a nice fourth, and possible excitement beyond that -- why the 15% drop? Turns out the third quarter would have been even better, except for a snag in the Pryor, Okla., plant. Each plant undergoes a scheduled two- to three-week shutdown for maintenance -- a "turnaround" period. The Pryor facility, which just came online this year, needed more extensive maintenance and repairs than had been anticipated. That cost the company 35 days of production, instead of the expected 14 to 21.

That was a sore spot with at least one analyst, Dan Mannes of Avondale Partners, who pointed out that during last quarter's conference call, management said the Pryor turnaround had been completed with no problems. Golsen said that was true, but "subsequent to that, we began to have some unplanned downtime, maintenance downtime."

Foolish bottom line
In my opinion, the 15% drop was way overdone. LSB's stock price did run up more than 30% before earnings (and is still 10% higher than a month ago), so perhaps expectations were just too high. The overall business still looks great to me, and I will consider buying more soon for my Rising Stars portfolio.

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