Carbon Capture And Ethanol Expansion Will Advance Prospects Amid Risks

Key Takeaways

• Carbon capture projects and facility expansion could enhance REX's net margins and boost revenue generation.
  
• Share repurchase and regulatory management are strategies to increase EPS and sustain revenue growth.
  
• Regulatory risks, cost pressures, and low selling prices threaten margins, while uncertain returns on investments may weaken financial stability and earnings growth.

Catalysts

Produces and sells ethanol in the United States.

• The completion and operationalization of the carbon capture and sequestration project, pending permit approval, is expected to contribute to REX's bottom line through valuable 45Z and 45Q tax credits, thereby potentially enhancing net margins.
  
• The potential expansion of the One Earth Energy ethanol facility is anticipated to increase production capacity, which could lead to higher revenue generation once operational efficiencies are realized.
  
• The possibility of year-round E15 blending, if legislated, may create increased ethanol demand, potentially boosting REX's sales and revenue.
  
• REX's strategic share repurchase program is helping increase earnings per share (EPS) by reducing the number of shares outstanding, thus providing value to shareholders.
  
• Careful monitoring and management of regulatory and tariff policies concerning ethanol exports, which represent significant portions of U.S. total exports, are crucial to maintaining favorable conditions for sustaining revenue growth.

REX American Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming REX American Resources's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.1% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $50.0 million (and earnings per share of $2.83) by about April 2028, down from $58.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 2.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

REX American Resources Future Earnings Per Share Growth

Risks

• The freight costs and logistics challenges amplified by potential tariffs on ethanol and co-product exports could affect international sales, causing revenue volatility.
  
• The anticipated delay in the expansion project timeline may lead to increased capital expenditure and potential budget overruns, pressuring net margins.
  
• The dependency on the EPA's approval for the Class VI injection well permit introduces regulatory risk, possibly delaying the carbon capture project's contribution to earnings.
  
• Lower selling prices across ethanol, dried distillers grains, and other co-products, despite increased sales volumes, could compress gross margins.
  
• Significant investment into growth projects without the certainty of returns carries the risk of reduced cash reserves, impacting the balance sheet and future earnings potential.

Valuation

• The analysts have a consensus price target of $50.0 for REX American Resources based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $839.6 million, earnings will come to $50.0 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.5%.
• Given the current share price of $39.57, the analyst price target of $50.0 is 20.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.