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REX 2Q Preview: Tough Qtr. Looks Like Bottom

|Includes:GPRE, REX American Resources Corporation (REX)

REX will report its fiscal 2Q (ending July 31) sometime in the next few weeks. This was a tough quarter for the company and all the ethanol industry, but it also looks like the low point for earnings with 3Q looking brighter.

M
y model suggests the company will earn approximately $0.25, down from $0.42 last
quarter as ethanol production margins contracted. However, corporate level cash should remain a robust $80 million, down modestly from last quarters $86 million due to the +$9 million purchase of NuGen in the quarter. 

Since the end of the quarter however (which is reported on one-month lag, so we are nearly two months into reported results), margins have improved. Total earnings spread (crush spread, less all other costs) was approximately $0.23 gallon in 1Q, should fall to $0.17/gallon in 2Q but is on track to be back up to $0.22 for 3Q. Because the addition of NuGen should be accretive, 3Q EPS should come in above 1Q, or roughly $0.50-$0.60 based on current margin trends.

SUMMARY: So while REX is still primarily an asset play, the earnings outlook is improving as well. At $0.50/qtr, Rex could earn $2.00 next year. Even assuming a low multiple of 8x-9x earnings, REX could be see $16-$18. 


Disclosure: Long Rex

Stocks: REX, GPRE