REX American Resources Stock: Don’t See Any Appeal Here (NYSE:REX)

Investment Rundown

REX American Resources Corporation (NYSE:REX) has seen its share price improve quite steadily over the last 12 months and does not display any of the volatility a lot of the border markets have. The FWD p/e is at over 15 right now and whilst it may be below where REX has historically been trading I don’t think any of the last report’s results should equal such a high premium above the sector, which is 44% currently.

The market for ethanol and other commodities that REX works with can be quite volatile which means that earnings reports may differ widely from time to time. What seems to be a trend right now for the company though is that average selling prices are decreasing and this limits the bottom line growth of the company. Apart from this, the margins seem to also be in a pretty steady decline as REX has been nowhere near reaching the highs it had in 2015 again. I don’t see any appeal in investing in this business and with the premium it trades at it introduces unnecessary risk to investors. This concludes to me rating it a sell for now.

Company Segments

REX and its subsidiaries are actively engaged in the production and sale of ethanol across the United States. Additionally, the company offers a diverse range of products, including corn, distiller’s grains, non-food grade corn oil, gasoline, and natural gas. One of its key contributions to the market is the provision of dry distiller’s grains with solubles, which serve as a valuable source of protein for animal feed, further extending the company’s impact across various industries. REX’s multi-faceted approach to its product portfolio underscores its commitment to catering to a wide array of market needs, contributing to its dynamic presence in the ethanol and related sectors.

Looking at the last decade the top-line growth has not been that impressive for the company, only averaging 1.8% CAGR. Looking at the bottom line though it has appreciated by over 17% in the last 10 years annually. That is fantastic but as we have seen, the net margins are decreasing and I do think it’s reasonable to assume that REX may not post YoY growth here for some time. The net income is right now even lower than it was in 2016 and certainly 2015 as well, over 3x the last 12 months results. I think this should all equate to a lower valuation being applicable but that doesn’t seem to be the case yet.

The market outlook for ethanol which REX is exposed to is estimated to continue growing at a low single-digit range in the next decade. REX has not been seeing the same type of CAGR for its top line as noted above here, just 1.81%. With a market cap of under $700 million, there should be plenty of room for REX to grow one could think. I believe part of the reason for the perhaps muted growth is the lack of investment incentives in the ethanol market as green energy is gaining plenty of traction right now and likely in the decades to come as well.

Bioethanol, a frontrunner in the renewable energy realm, possesses the potential to revolutionize the energy landscape as a sustainable energy source. Its prominence is further accentuated by its environmentally friendly attributes, offering a cleaner and more efficient combustion process. I think this is a key market for REX to focus more on and ride the green energy wave. Capital expenditures have been rising for the company and are in the last 12 months at $21 million, up from $5.1 million in 2022.

Risks

REX, as a company, faces a significant challenge in the form of low-profit margins. Its current net margins hovering at just over 3% might not be particularly impressive. However, it’s crucial to note that REX has a commendable track record that demonstrates its potential to achieve higher margins. The prospect of reverting to the more favorable 12-13% net margins, as seen in 2015, is not only a substantial improvement but also a testament to the company’s adaptability and resilience within the industry. In 2015 the company had its highest net income but has since seen a decrease of roughly 70% as commodity prices have depreciated.

What has furthermore added to the depreciating net income and margins has been lower selling prices and volumes. Ethanol gallons sold decreased by over 2 million YoY but saw a 5 million increase YTD compared to 2022 YTD. This volatility is something to be expected I think. What I still believe though is that both Q3 and Q4 will display lower selling prices across the board with the various commodities that REX sells and this will lead to a lower net income and a higher p/e. I say this because commodity prices spiked in 2022 as the war in Ukraine began. Now we are returning to a more normal state of less elevated prices. The price of ethanol has been trending downwards steadily as seen here. I don’t see any fundamental shifting that would cause a reversal in the pricing environment, and therefore Q3 and Q4 will likely post lower selling prices in my opinion. I think the markets are anticipating a turnaround here but I don’t see it. REX might be debt-free but they have not been able to grow margins during the last several years and that is a key factor I look for in investments. Estimates point to some recovery in the bottom line over the next several years but as I see it the proof is in the pudding and until that is shown in black and white on an income statement I won’t be a buyer.

Financials

Looking at the financials of the business the cash position has risen quite strongly since the last of January this year and is now at $102 million. This lets REX be a little more flexible in their investments I think and could be a reason for the slight premium the p/b has against the 5-year average for the company, right now being at 1.43. There have not been any significant improvements in the property and equipment for the business though which is where I would be looking. I would hope that REX could grow its operations further capture some of the bioethanol market share and generate a strong growth rate as a result. They have the cash available to do this in some manner so I will be keeping my eyes here in the coming couple of reports by the company.

Final Words

The share price has grown steadily over the last 12 months for REX but I think the deteriorating net margins are a key risk for investors right now. If this doesn’t reverse we are not far off from REX posting a negative EPS. The markets they are in are expected to continue to grow, but perhaps not at any rapid rate, most under 5% annually or so. When I am looking at an investment opportunity I would prefer to see an annual expected CAGR between 9 – 11% indicating there is a large amount of momentum and demand present. The corn market in the US has had some hard times this year as production is lower likely caused by softer demand. I will be rating the company a sell because of the risks I see presented here like a high valuation against the sector. Softer market conditions are a real cause for a lower valuation and bleak outlooks for selling prices I think further add to a lower valuation being applicable here. Furthermore, I think there is a lack of shareholder-beneficial activities here like buybacks or a strong dividend which means a higher valuation may be justified. There are plenty more companies in the same sector at lower premiums with for example high dividend yields or strong buyback programs. I won’t be more optimistic about the business until the net margins are reversing quickly or the p/e falls to a more reasonable level of around 10x.