Rex Stores: Look for Free Cash Flow to Accelerate

 |  Includes: AVR, GPRE, PEIX, REX
by: Clumsy Rick, CFA

Rex Stores (RSC), the ethanol producer, should see a significant acceleration in free cash flow starting in the second half of this year. Assuming the price of corn and ethanol (or the ratio of the prices) remains relatively stable, Rex's free cash flow could reach an annualized rate of $20-25 million ($2-2.50/share). If correct, this means the market is valuing RSC shares at an inexpensive 4x-5x free cash flow.

There are several positive events for Rex coming up in the 2H09. First, Rex will have completed its exit from its legacy retail business in 2Q09, freeing up capital and management while putting end to its financial drag. Second, the One Earth Energy ethanol plant Rex is a majority investor in should be up and running by the end of the 2Q09. I believe this plant will add to profits and operating cash flow modestly based on current ethanol and corn prices.

Additionally, the completion of this project will mean the end of substantial capital expenditures flowing through the company's financials (even if it was funded by non-recourse debt of the partnership, consolidated on Rex's balance sheet).

Finally, Rex revealed on its 1Q conference call that the Levelland-Hockley plant it is a majority investor in was not operating at capacity for part of 1Q09 because of maintenance. After the maintenance, however, production at that facilty apparently improved.

Thus, the financial results from this plant should look better in 2Q09 and beyond.

My estimate for $20-$25 million in free cash flow comes from a runrate of $6-$7 million in operating cash flow per quarter and about $1 million in maintenance capital expenditures per quarter. This estimate does not include cash flow from the potential sale of any of its former retail stores or its distribution centers.

Disclosure: Long RSC shares