2023-06-06 10:59:23 ET
Summary
- REX American Resources Corporation specializes in alternative energy solutions focusing on the production and distribution of biofuels including ethanol and distillers grains.
- The company has a strong financial position with a growing cash position and no long-term debt, allowing for continued share buybacks.
- Despite recent growth in sales and margins, the current valuation does not justify a buy rating, making REX best suited as a hold for investors seeking exposure to the ethanol industry and distillers corn growth.
Investment Summary
REX American Resources Corporation ( REX ) is a reputable company within the energy and renewable fuels sector. Specializing in alternative energy solutions, REX American Resources works in a niche of production and distribution of biofuels, including ethanol and distillers grains. The distillers grain oil specifically is estimated to see a decent CAGR of over 10% until 2030, presenting REX with the opportunity to capture this momentum and reflect a similar growth of their own.
The diversified revenue streams the company has grown revenues at a solid rate of 9.5% YoY and Q1 sales ended up at $212 million. Despite not having a dividend the company has provided plenty of value to shareholders through the years, buying back vast amounts of outstanding shares seems to have helped build investors' positions value a lot. REX has managed to keep a positive bottom line for the last 13 years with the exception of 2020, and with stability like that, I see value to be had here for investors. Although, the growth doesn't seem to be sufficient right now to help justify a buy in my opinion. A hold rating could possibly turn into a buy if the price goes down a little. In recent weeks the company has seen a large share price increase and I would have preferred getting in under $30 rather than above. It would have helped provide a little more margin of safety, which I think is necessary given the low margins REX has constantly kept.
Market Outlook For Ethanol And Corn
Looking ahead, the market for both ethanol and corn seems to be very positive. The ethanol market might be the most stable with a CAGR of around 4.2% between 2022 - 2030, driven primarily by the demand for new and reliable renewable energy sources. Bioethanol has the possibility of being a renewable source of energy and burns much more cleanly.
Selling Prices (Q1 Report)
Looking at the last report from the company, they have on a yearly basis been able to increase the volumes of ethanol they sell which has helped offset some of the price decrease seen in the market. But the company is also exposed to other markets as mentioned, like distillers grains and corn oil, both of which have a bright future ahead.
Distillers corn oil for example is expected to grow at a CAGR of over 10% until 2030, driven much by the demand the poultry industry is placing through increased production to meet demand. Distillers corn oil will play a vital role in the feed that poultry get. But demand for biodiesel is also playing a part in the growth of the industry.
Earnings Highlights (Q1 Report)
Looking at the last report, the company managed to grow the gross margins faster than the sales. Sales saw a 9.5% YoY increase, whilst the gross profits increased 26%. This gives me a lot of confidence that REX might be able to start growing their earnings further and actually keeping them at a high level. Despite the decrease in ethanol prices, seeing a margin expansion like this is meaning the measure the company is taking to cutting costs. As mentioned by the CEO Zafar Rizvi in the last report , “we intend to continue our strategic investments in the efficiency and capacity of our plants and moving our carbon capture and sequestration initiatives forward”. This comment I think highlights what I just mentioned, the measures the company is taking to make its operations more smooth are paying off and margin expansion like this will be a result of it. Going into the coming quarters, seeing a continued uptick could be a catalyst for the share price and cause a similar move upward like we have seen the last 2 - 3 weeks.
Risks
With REX, I think the most prominent risk is the low margins the company has. Net margins of barely over 3% aren't that impressive, but the company has a track record that proves it can be above that. Getting back to 12 - 13% net margins, like in 2015 would of course be a major improvement, but also would showcase that the company can grow with the industry and won't be left behind.
Ethanol Prices (tradingeconomics)
Besides that, since REX is generating a large portion of revenues from ethanol, an unstable market would cause very inconsistent earnings reports and could potentially make REX have a negative bottom line even. The increase in volumes and margin expansion has so far seemed to offset any risk that decreasing ethanol prices have for the company.
Financials
Moving over to the financials of REX, I see some signs that paint a positive picture. The cash position has been increasing on a QoQ basis which of course is great to see. Without any long-term debt, the $77 million cash position still leaves the company able to nearly pay off all current and long-term liabilities combined. Being in this sort of position of course makes REX able to keep up the strong share buybacks they have had over the years.
Balance Sheet (Q1 Report) Balance Sheet (Q1 Report)
Going into the coming quarters, I don’t think the balance sheet will necessarily be in the spotlight. The only reason I could think that would make it so, would be REX taking on long-term debt. Something that would in my opinion, quite frankly, be unnecessary. Instead, I would keep an eye on whether or not the company is still increasing its cash position or not. All in all, though I think that REX has a stable financial position and I don’t see any alarming signs on it, except perhaps as an investor you would be paying a p/b of around 1.3x right now, which is not exactly overvalued, but neither a bargain too.
Valuation & Wrap Up
REX has exposure to a variety of industries, all of which seem to point to the demand for products that REX procedures will be there. With the last report showing the company able to grow margins at a strong rate, it seems to have been a catalyst for the share price and the FWD p/e now sits around 17 - 18x. This doesn't really make REX a very undervalued play right now, and I think a 9.5% YoY increase in sales doesn't make my hold rating go up to a buy right now.
The most intriguing part of REX is in my view the share buybacks the company is doing. Going back the last 5 years, they have reduced it by around 10%, all while the share price has grown 41%. Going forward, I think that REX is best suited as a hold for investors seeking continued exposure to the ethanol industry and the growth expected to be had with distillers' corn. For me though, I wouldn't be a buyer at these prices, I would be more interested at a p/e of around 12 - 14x instead.
For further details see:
REX American Resources Corporation: Phenomenal Balance Sheet Brings Stability