Rex American Resources: EPS Upside Potential on Growing Crush Spreads

| About: REX American (REX)

Rex American Resources (NYSE:REX) is a value play in the ethanol industry. In my last article on Rex (Why Rex American Resoures Could Be Worth 70% More), I suggested the stock had 70% upside based on the potential to earn $2.50/share this year, up significantly from last year's pro forma $1.41 and well above the consensus forecast of $1.68. Since then, ethanol/corn crush spreads and profit margins for the industry have expanded dramatically. Based on rising profit margins, I have even more confidence in the company being able to hit and probably exceed my $2.50 estimate for this year.

Over six weeks, the corn/ethanol crush margin spread, not including the sale of dried distillers grains or other co-products, went from slightly negative to an 11-month high at $0.33 per gallon. Based on the current spread, I believe REX would earn well over $1/share in both Q3 and Q4 of this year.

The recent increase in industry profitability came too late to have a meaningful impact on Rex's Q2 results that will be reported in about 4-5 weeks. Although the quarter officially ended on July 31, the earnings from its subsidiaries are reported on a one-month lag so that the financial results largely reflect crush spreads through June 30. Despite this, there still appears to be large upside potential to Q2 earnings forecasts. The consensus forecast for Q2 is only looking for EPS from continuing operations of $0.20, down from Q1's previously reported $0.43 despite the fact that industry crush spreads have only modestly contracted during this time. Certainly there are reasons that REX's Q2 earnings could be a bit below Q1 (i.e., hedges, interest rate changes, compensation accruals, etc.), but a decline of over 50% sequentially seems extreme.

Given bullish trends in industry margins and significant earnings upside potential in coming quarters, I think REX could trade at over $28/share (11x +$2.50/share EPS forecast for 2011) by the end of this year. This price target is also supported by a book value per share that is currently over $26.

Disclosure: I am long REX.