REX American Resources: This Deeply Undervalued Company Offers Long Investors A Return Of 40% Or More By 2021 - Behind The Idea

Summary

• REX American Resources is a best-in-class ethanol producer that has historically been one of the independent sector's highest-margin producers.
• The company's share price has collapsed in response to the COVID-19 pandemic and associated ethanol demand destruction.
• The market is pricing REX American Resources substantially below its liquidation value. This is despite the company's very strong balance sheet that makes bankruptcy extremely unlikely to occur.
• I utilize EV/adj. EBITDA analysis and liquidation analysis to calculate share price targets for REX American Resources under both pessimistic and optimistic scenario assumptions.
• Both analyses support a 2021 price target range that would result in a share price return of at least 40%. The liquidation analysis further shows that the potential downside is very limited.

This article was selected to be shared with PRO subscribers, who also got 7 days' exclusive access to Tristan R. Brown's original Top Idea on REX American Resources (NYSE:REX). Tristan R. Brown is an energy market expert, lawyer, and associate professor. Find out more about PRO here.

Seeking Alpha: Can you briefly summarize your bullish thesis for readers who may not have seen it yet?

Tristan R. Brown: The ethanol sector has experienced the destruction of a large volume of demand in recent weeks due to a social distancing-induced decline to gasoline consumption. A substantial fraction of U.S. ethanol production capacity has been idled in response, and the share prices of independent ethanol producers have fallen sharply as their near-term earnings potential has decreased. Independent producers are being priced for possible bankruptcy with price-to-book ratios that are well below 1x. Ethanol demand is guaranteed to rebound to its pre-2020 volumes next year due to the federal biofuels blending mandate, but this will potentially be too late for some producers.

That said, the market is overlooking the fact that independent producers did not enter the demand destruction environment with equally-weak balance sheets. REX American Resources differs from its independent peers in that it has no debt and possesses a large cash reserve. Furthermore, the company has been a high-margin producer relative to its peers and can expect to quickly return to profitability when ethanol demand rebounds. What the market is missing is the very high probability that REX American Resources will enter 2021 in a strong financial position regardless of how much ethanol demand destruction actually occurs this year. In the meantime its share price provides long investors with strong downside protection given that the company's more liquid assets are equivalent in value on a net basis to over 90% of its market capitalization. Even in the extremely unlikely

Analyst’s Disclosure:I am/we are long REX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.