Ethanol Expansion And Carbon Capture Innovations Promise Brighter Fiscal Horizons

Key Takeaways

• Expansion and investment strategies in ethanol production and carbon capture are poised to improve efficiency, profitability, and environmental standings.
  
• Strong financial management focusing on debt-free operations and strategic share buybacks aims to bolster financial stability and shareholder value.
  
• Reliance on regulatory approvals for CCS projects and the volatility in ethanol prices alongside expansion investments introduce uncertainties affecting future earnings and financial stability.

Catalysts

Produces and sells ethanol in the United States.

• Expansion of the One Earth ethanol production capacity to 175 million gallons, with plans for further expansion to 200 million gallons, will likely lead to increased production efficiency and profitability, impacting revenue positively.
  
• Investment in carbon capture and sequestration (CCS) projects, despite regulatory hurdles, suggests a future potential for lower carbon intensity scores and potential eligibility for tax credits under 45Q or 45Z, affecting long-term net margins positively.
  
• Management's emphasis on maintaining operations without incurring debt strengthens the company's financial stability and resilience, potentially improving net income margins.
  
• REX's focus on profitability over volume in ethanol production, coupled with a stated robust corn harvest forecast, may result in favorable input costs and improved gross margins.
  
• Ongoing share buyback programs, indicated by management as a strategic priority, could enhance earnings per share (EPS) by reducing share count, especially during periods of stock price undervaluation.

Assumptions

• Analysts are assuming REX American Resources's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.6% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $57.0 million (and earnings per share of $3.95) by about November 2027, down from $69.2 million today.
• 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 2027 earnings, up from 11.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 6.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• The reliance on regulatory approvals and permits for the carbon capture and sequestration (CCS) project introduces significant uncertainty, potentially delaying project timelines and impacting future earnings.
  
• The fluctuation in ethanol and related product prices, as seen with the decreases in average selling prices from 2023 to 2024, poses a risk to revenue and profit margins if these trends continue or worsen.
  
• The company's expansion efforts and investment in CCS and ethanol production capacity expansion are substantial, with approximately $91 million invested as of the second quarter 2024, posing a risk to financial stability if these projects do not yield the expected returns.
  
• The notable reduction in ethanol sales volume and lower average selling prices across all products in Q2 2024 compared to Q2 2023 present risks to the company's revenue stream and could constrain earnings growth.
  
• The delay in construction due to the moratorium on CO2 pipeline construction in Illinois and the adjusted construction schedule signals potential future delays and additional costs that could negatively impact net margins and ROI on the CCS project.

Valuation

• The analysts have a consensus price target of $60.0 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 2027, revenues will be $839.0 million, earnings will come to $57.0 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $43.95, the analyst's price target of $60.0 is 26.8% higher.
• 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.