I recently wrote an article highlighting the fact that ethanol crush margins have skyrockted to an 11-month high, signficantly improving the earnings outlook for my favorite ethanol and value stock, Rex American Resources (REX). Since then, markets have sold off precipitously, dragging stocks with both good and bad prospects down. However, over this time, ethanol spreads have actually improved. Impressively, this happened even as wholesale gasoline prices have declined.
Based on the Sept. 2011 futures prices, the ethanol crush spread stands at $0.38/gallon, which is up from $0.33 just over two weeks ago and slightly negative about two months ago. In my article, I suggested REX's 2011 EPS would be over $2.50/share with a $0.33 crush spread. As ethanol crush spreads can be volatile, I will assume only $0.25 the rest of the year. At this level, I estimate Rex could still earn +$3/share this year. This compares quite favorably to the Street consensus at only $1.68. If we assume the same 10x P/E the stock has been trading on based on consensus, REX shares should be over $30 as this forecast plays out.
Rex's 2Q results, to be reported in about four weeks, will not reflect this high level of profitablity. However, even based on a similar crush margin in 2Q that the company had in 1Q, earnings should exceed the current consensus of $0.20 by a wide margin.
REX shares are also attractive from an asset value standpoint. Book value stood at over $26/share at the end of 1Q11. The company had over $8/share in net corporate cash, $1/share in tax assets and $2/share in real estate at book value (market value is likely higher, in my opinion). These hard assets should also provide some downside protection in case the stock market continues to fall and/or ethanol margins start to decline again.
Finally, there is an outside chance that management could simply take the company private. Assets trade below book value, in my opinion well below market value. The business outlook has improved dramtically over the last 12 months and management could capture this upside by taking it private. Also, remaining a public company has few benefits for a microcap like REX with under 10 corporate level employees -- considerable expenses it could eliminate as a private company. While going private would seem compelling, this is only a potential side benefit in owning REX shares. The fundamentals fully justify owning the stock all on their own.