Rex Stores: Low-Risk, Pure Play on Ethanol

I won’t argue the economics or outlook for ethanol as there has been plenty written about it recently and I am no expert in alternative energy. However, if you believe ethanol has a future, Rex Stores (RSC) is a low-risk (dare I say “no risk”) way to invest in the industry. Rex’s cash of $9.50-$10.50/share nearly equals the current stock price. Real estate and other assets could be worth an additional $7.00 per share. Thus, at $10/share, investors get interest in various ethanol assets of approximately 139 million gallons per year (mgpy) production at name plate capacity for free.

As its name implies, Rex has its roots in the retail industry as a consumer electronics chain in small towns across America. Over the years, competition from Wal-Mart (WMT) and Best Buy (BBY) ate into the company’s sales and profits. Rex began shrinking its store base in 2003 and will have completely exited the retail business in 2Q of this year. Along the way, the company invested in alternative energy projects, including synthetic fuel from coal and, more recently, ethanol plants.

Substantial assets

Corporate Cash: Rex had $90 million in corporate cash at the end of 4Q. At $9.50/share, the cash alone nearly equals the current stock price! This cash should grow with retail inventory and other working capital liquidation in 1Q, bringing cash per share to approximately $10.50 share, by my estimation. This cash does not include partnership level debt, which is non-recourse to Rex, or $10 million in mortgage debt, which I account for under its real estate.

Real Estate: Rex is leasing 37 retail stores to Appliance Direct, the company that is taking over the majority of Rex’s retail business. Appliance Direct has the option to buy these stores from Rex for approximately $33-$35 million over the next two years. Additionally, Rex owns two distribution centers from its retail operations worth an additional $15-$20 million (based on 2007 appraisal for one DC and asking price of other). Netting out $10 million in mortgage debt, Rex has approximately $38-$45 million in real estate value, or $3.75-$4.50 per share.

Tax Credits: Excluding $7.8 million in refundable income taxes, Rex had $32 million, or over $3.00/share, in tax credits at the end of 4Q which can be used against taxes on general income in the future. These credits are largely related to Rex’s past interest in synthetic fuel production facilities. Additionally, the company could receive $2-$2.5 million in cash from a residual synthetic fuel claim.

Ethanol Ownership: Rex is the majority owner in two ethanol plants with name plate capacity totaling 140 mgpy and a minority owner in plants with name plate capacity of 392 mgpy. Two of the 100 mgpy plants are coming on line this month. In total, Rex’s ownership interest equates to 139 mgpy of name plate capacity, an estimated 150 mgpy actual production. Rex is not required to make any additional capital commitments; it may do so if the terms are favorable.

Disclosure: Author holds a long position in RSC and BBY

Comments

[logicalthought:]

I have no idea as to whether or not Rex Stores is worth an investment (especially as I think that corn-based ethanol is a disaster), but I figure that anyone humble enough to post an article here under the byline of "Clumsy Rick" (as opposed to the myriad of posting "pundits", "seers", "winners", "Dr."s who aren't M.D.s, etc.) is worth at least a courtesy listen.

May 30 04:57 PM

[microcaptrader:]

I've been following and investing in Rex for some time now. The stock price has rarely accurately represented the fundamental value of the company.

This may have been largely due to the multi-personality nature of its business segments. Now that Rex is a pure ethanol play (albeit with some real estate assets) I'm hopeful management will find a way to return some value to shareholders.

A one time large cash distribution would suffice. Taking the company private at a fair valuation would do the job. Spinning off the Real Estate and Alt Energy assets into separate companies (or selling the Real Estate) the market might be more willing to value fairly might work as well.

So far, RSC has been a value trap. You know the value is there, but the market refuses to acknowledge it.

May 30 06:44 PM

[AlexS:]

They had a store in town some years back. Pretty nice store, competitive prices, and good stuff, mostly TVs and TV type furniture. Hard to fight Wal Mart and Sears I think. I bought several items from them. I asked them once if they were going out of business and they said the company guaranteed they'd stay for 5 years no matter what. Five years came and went, they closed down, and now that location is a dollar store.

May 30 06:50 PM

[petelynchdi...:]

You had me at "cash of $9.50-$10.50/share". Clumsy Rick has certainly done his homework on this one. It's astounding that Rex actually trades near its cash value (sometimes below) while it has these real estate and ethonal assets with virtually no debt. I wasn't even aware of the tax credits. The market is wrong... Clumsy Rick is right.

Jun 01 10:06 AM

[Dan Williams:]

Rick, I went to CNN.COM and did a stock quote for Rex. The screen also shows the balance sheet. According to it, there is over $100M of long term debt. Is this right? If so, do your figures take it into consideration?

Jun 01 12:58 PM

[Clumsy Rick:]

Dan,

Rex has majority positions in two ethanol companies (LLCs) and therefore has to consolidate the balance sheets of these entities on its own balance sheet. However, with the exception of approximately $10 million in mortgage debt that I accounted for in the real estate valuation (net $4/share real estate), all the debt belongs to the ethanol LLCs. It is all non-recourse debt, meaning its separate from Rex, the corporate entity. If these ethanol LLCs ever had to declare bankruptcy, the debt holders (banks) could only go after LLC assets, not Rex corporate assets including the $90-$100 million in cash and its real estate.

So when building up a value for RSC shares, I looked at unencumbered corporate cash (roughly $10/share), real estate (estimated at $4/share, including mortgage debt) and tax credits (roughly $3/share). With this coming to $17/share, you are getting all leftover net assets (modest corporate assets and ethanol LLC investments, less debt) for free.

If you were to try and value its ethanol LLC interests, then you would have to net the approximately $100 million in LLC debt against the substantial LLC assets on Rex's balance sheet, including much of the $235 million in PP&E. I didn't bother trying to value this, since ethanol is so controversial and any estimate I made would be highly uncertain. I simply look at the stock as approximately $17 in solid assets and a free option on ethanol.


On Jun 01 12:58 PM Dan Williams wrote:

> Rick, I went to CNN.COM and did a stock quote for Rex. The screen
> also shows the balance sheet. According to it, there is over $100M
> of long term debt. Is this right? If so, do your figures take it
> into consideration?

Jun 01 01:51 PM