LSB Industries, Inc. LXU

1. LSB Industries, Inc. (LXU) Materials and Industrials Group

2. Firm Summary Manufacturing, marketing, and engineering company Principle activities: Climate control (commercial and residential), Chemical products Market Cap: $148.74 Million Bottom Line: Small company with specialized products and growth opportunities Based in Oklahoma City, OK Climate Control � Air conditioning, heating; geothermal and water heat pumps; hydronic fan coils, air handlers Chemical � most notably Nitric acid, ammonium nitrate, and explosives 1,788 full-time employeesBased in Oklahoma City, OK Climate Control � Air conditioning, heating; geothermal and water heat pumps; hydronic fan coils, air handlers Chemical � most notably Nitric acid, ammonium nitrate, and explosives 1,788 full-time employees

3. Fundamental Analysis Part II:

4. Porter�s Five Forces (Chemical) Threat of Substitutes: Little differentiation, easy substitution -> High price sensitivity Buyer Power: international clients � Canada, Mexico, U.S.; i.e. BayerBuyer Power: international clients � Canada, Mexico, U.S.; i.e. Bayer

5. Porter�s Five Forces (Climate Control) Threat of Substitutes: Not too many substitutes High differentiation of products Rivalry: Mestek, Inc. 60M v. United Technologies Corporation 40+B Buyer: homes, hospitals, hotels, offices, schools � virtually every type of building; specifically for geotherm, water heat pump Threat of Sub: check out website� lots of exclusives, claims to be most efficient of certain productsRivalry: Mestek, Inc. 60M v. United Technologies Corporation 40+B Buyer: homes, hospitals, hotels, offices, schools � virtually every type of building; specifically for geotherm, water heat pump Threat of Sub: check out website� lots of exclusives, claims to be most efficient of certain products

6. SWOT Analysis: Strengths v. Weaknesses Split into subsidiary companies, each called a �business� with own organization and management Market leaders segments of fertilizer, explosives, acids, and environmental control markets Small size Vulnerable to government regulation 1) Highly efficient and specialized, wide consumer base in all sectors 2)Chemicals � Largest supplier of concentrated nitric acid, etc. see next slide Climate Control � Leading producer of hydronic fan coils, water source heat pumps, and geothermal products for heating and cooling � all environmentally friendly and have recently benefitted from and has potential to keep benefitting from recent �green movement� 3)Small size � limited financial resources, but has made a point to keep a lot of resources on hand Limitations in offering new stock Also contributes to transparency 4) Gov�t reg � chemical business (e.g. ammonium nitrate)1) Highly efficient and specialized, wide consumer base in all sectors 2)Chemicals � Largest supplier of concentrated nitric acid, etc. see next slide Climate Control � Leading producer of hydronic fan coils, water source heat pumps, and geothermal products for heating and cooling � all environmentally friendly and have recently benefitted from and has potential to keep benefitting from recent �green movement� 3)Small size � limited financial resources, but has made a point to keep a lot of resources on hand Limitations in offering new stock Also contributes to transparency 4) Gov�t reg � chemical business (e.g. ammonium nitrate)

7. SWOT analysis: Opportunities v. Threats Pryor Facility � chemical production, scheduled to start operation in 2009 Climate Control � geothermal heat pumps Global Warming Increasing Regulation � new costs to security, insurance, ammonium nitrate health concerns Pryor � chemical production facility in Oklahoma - if all goes well, scheduled to start operation in second and third quarter of 2009 total cost est: 15-20 million (funded by cash on hand and working capital), total est increase in annual sales: 120 million Climate Control - Geothermal Heat Pump Tax Incentive give tax credit (10% of cost) to those using geothermal heat pumps (GHP)� LHB is North America�s leading producer of GHPs 40% energy use in U.S. � homes and buildings, mostly for heating and cooling -> large sector 3) Global Warming � Good � enviro-friendly Bad - weather conditions has significant effect on sales � current upward trending of temperature to continue? 4) Increasing Regulation � security level and insurance on factories Ammonium nitrate + use in fertilizers But routine, everyone in industry has to face, and expectant Pryor � chemical production facility in Oklahoma - if all goes well, scheduled to start operation in second and third quarter of 2009 total cost est: 15-20 million (funded by cash on hand and working capital), total est increase in annual sales: 120 million Climate Control - Geothermal Heat Pump Tax Incentive give tax credit (10% of cost) to those using geothermal heat pumps (GHP)� LHB is North America�s leading producer of GHPs 40% energy use in U.S. � homes and buildings, mostly for heating and cooling -> large sector 3) Global Warming � Good � enviro-friendly Bad - weather conditions has significant effect on sales � current upward trending of temperature to continue? 4) Increasing Regulation � security level and insurance on factories Ammonium nitrate + use in fertilizers But routine, everyone in industry has to face, and expectant

8. Financial information

12. Competitor Analysis: The Good News: LSB Industries� Quick Ratio and Growth Rate for Sales far out-performs both its closest competitors and the industry as a whole. LSB has a distinct advantage over both competitors because both Lennox and Aaon only specialize in climate control products, whereas LSB specializes in both that and the chemical industries. This diversification is advantageous. The Not-So-Good News: Price to Book ratio of LXU is lower than those of its nearest competitors, but higher than the industry average. While it beats the industry for the ROA, it can�t top Aaron Inc.

13. Valuation Part III:

14. Standard Valuation Metrics Market Cap: 145.34M Trailing P/E (ttm, intraday): 4.30 PEG Ratio (5 yr expected): 0.40 Price/Sales (ttm): 0.22 Price/Book (mrq): 1.23

15. Standard Valuation Metrics

19. Conclusion Part IV:

20. Drawbacks Return on Assets- low, 11.24% % Stock held by non-insiders and non-institutions low: 2.49%. This means that the stock is more volatile, considering that the vast majority of it is owned either by few, large funds or parties who have nonpublic, valuable information about LSB. Negative quarterly earnings (y.o.y): (-77.30)% Very high level of debt: .961 debt/equity ratio. Overall high level of debt: 123.53M. The primary business practice of LSB is climate control. This product is considered more of a luxury, so the demand for their product may be considered more elastic. Given the current financial crisis, people may be cutting down on air conditioning to better finance other necessities, fuel, medicine, food, etc.

21. Conclusion -Based on our quantitative analysis of the DCF, financial statements, and closest competitors and a more qualitative analysis through the SWOT, we�ve come to the conclusion that LSB Industry stock is undervalued, even in the most pessimistic scenario. -Our verdict: BUY