Rex Stores: Reaching an Inflection Point in Earnings 7 comments
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As a follow up to my last post on Rex (RSC) on September 4, the company reported second quarter results this morning that were quite positive. EPS were $0.09 (about $0.03 excluding an accrual benefit), reversing the trend of losses from the last three quarters.
The ethanol division would have been break even except for the start up costs at the last plant it opened. More importantly, ethanol margins have improved in third quarter so far and all plants are operating profitably.
Another positive update was on the real estate front where the company is making progress leasing out vacant properties, including part of its largest distribution center for which a lease was signed after the close of the quarter. In addition to property it is already landlord on, the company can either sell or lease out 23 former stores and 2 distribution centers.
- Estimated Asset Valuation Update: Corporate Cash and + $7 million Tax Refund = $9.50/share
- Real Estate: 43 stores and 2 warehouses, net $3 millon mortgage = $5.00-$5.50/share
- General Tax Credits: $3.40/share
- Ethanol Interests (138 million gallons per year at name plate capacity): ?????
In summary, Rex has substantial assets, including cash and tax credits that exceed the current share price. The bleeding has stopped and there is the potential for a significant increase in earnings and cash flow in coming quarters as the company leases or sells vacant properties and as ethanol turns profitable, as it has done so far in third quarter.
Disclosure: Long RSC
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My biggest fear is that management uses the cash in a risky way. Rather than accelerate a stock buy back program to a sustainably higher level, offer to take the company private or some other actions to increase shareholder value, I fear management decides to invest a large portion of its cash (shareholder's cash, I should say) in one or two big projects over the next year that ultimately fail.
It could be more ethanol plants, which is what it sounds like they are looking at. At this stage, I believe the outlook for ethanol is improving, but I'm sure I don't need to tell you how uncertain the long term outlook for the industry still is. So investing a lot more money in ethanol would essentially raise Rex's risk and potential payoff, but would at least temporarily cut the base out from under the stock, in my opinion, as the cash per share value drops.
On Sep 10 11:14 AM microcaptrader wrote:
> So what are we missing here Rick? Given the obvious fundamental value
> of rsc and the woefully misrepresentative stock price combined with
> Mr. Rose's opinion of the company's future over at least the next
> few quarters, i'm tempted to take every available penny I have and
> plow it into RSC shares. It seems like such an obvious intermediate
> term trade. Where are the hidden landmines? Email me at jaylelbe
> @ hotmail . com if you care to discuss offline. I've been a RSC
> shareholder for what seems like ages now.
One data point that would make me more comfortable increasing my RSC position would be to know the approx cost of updating Rex's current plants to whatever next generation ethanol production method comes into favor. The mandate is out there so we know that ethonal demand will continue to increase. At least over the next 3 years.
Here's hoping for a blowout 3rd quarter!
The real news is that ethanol margins have been skyrocketing, which should ramp up income for Rex slightly in 3Q and much more in 4Q. See article for more details:
'Christmas' in October for Ethanol
Rise in Cost of Energy Drives Up Margins; Support for Depressed Corn Prices
By IAN BERRY
CHICAGO -- Renewed life in the ethanol industry is drawing the attention of Chicago Board of Trade traders and analysts, giving the corn market a boost.
Ethanol producers, which spent much of the past couple of years operating in the red, lately have been enjoying wide profit margins, and as a result have been seeking more corn and ramping up production.
Just last week, with energy prices advancing, ethanol processing margins jumped to a dollar a bushel, almost doubling what they were the previous week, said Rich Feltes, vice president of research for MF Global.
"They have every incentive to get their hands on every bushel of corn, and run these plants 24/seven, and push out as much ethanol as they can, pay down their debt," Mr. Feltes said. "This is Christmas time for ethanol plants."
Producers are "clamoring" for cash corn, said Bill Gentry, a broker/analyst with Risk Management Commodities in Lafayette, Ind. He said that has probably removed a lot of grain from the commercial pipeline. He said he has noticed more truck activity related to ethanol for the past six to eight weeks.
The improved ethanol outlook is due to expectations of a large corn crop that has lowered corn prices relative to crude oil and ethanol, Rabobank said in an October report. Friday, the U.S. Department of Agriculture estimated the U.S. corn crop at 13.018 billion bushels and corn used for ethanol at 4.2 billion bushels.
From early June to early October, CBOT corn prices fell 28.5% while crude oil was roughly flat and ethanol futures increased 2%, the bank said.
On Sep 18 01:37 PM just_great wrote:
> Is everybody missing the 1000 lb gorilla? There biggest tenant (Appliance
> Direct) backed out of the entire gig. So much for the steady stream
> of lease income. Do ye homework!
"Our ethanol business earned $49 million of operating income in the third quarter, more than double the second quarter results, as we increased run rates at all seven ethanol plants and captured very good margins. In October, ethanol margins have continued at strong levels.”
"Ethanol (1):
Ethanol Production (Thousand Gallons per Day) 2,116
Gross Margin per Gallon of Ethanol Production $0.59
Operating Costs per Gallon of Ethanol Production:
Ethanol Operating Expenses $0.31
Depreciation and Amortization $0.03
Total Operating Costs per Gallon of Ethanol Production $0.34"
**********************
So...Valero reported operating profit of $0.25 per gallon on 190 million gallons for the quarter ended September 30th, 2009. RSC's quarter ends October 31st. October reportedly has seen the best ethanol crush in a while. I expect better numbers both because of higher gross margins and lower operating costs. Using the $0.25 though and assuming an %80 production rate (28 milion gal) gives an operating profit of $7 million pretax.
That's $0.76 per share for the quarter or $3.04 for a full year from Ethanol alone. Other revenues from leased property, ect... should push the number higher. Slap a PE of 10 on that and RSC should be at $30 a share.
Now all that has to happen is for the Ethanol markets to remain rational and for RSC to execute. I predict happy days ahead for investors in this company!