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REX American Resources

Expanding Ethanol And Carbon Capture Projects Promise Growth, But Regulatory Hurdles And Margin Pressures Threaten

WA
Consensus Narrative from 1 Analyst
Published
September 17 2024
Updated
January 29 2025
Share
WarrenAI's Fair Value
US$55.00
29.2% undervalued intrinsic discount
29 Jan
US$38.93
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1Y
-11.5%
7D
-6.6%

Key Takeaways

  • Ethanol production capacity expansion and strategic export position are poised to significantly boost REX American's revenue and sales.
  • Financial flexibility due to cash reserves and no debt enables investment in growth projects, enhancing earnings and shareholder value.
  • Delays in projects, policy uncertainties, and rising costs could impact REX's revenue growth and profit margins despite higher sales volumes.

Catalysts

About REX American Resources
    Produces and sells ethanol in the United States.
What are the underlying business or industry changes driving this perspective?
  • The completion of the One Earth Energy ethanol production capacity expansion to 175 million gallons per year by mid-2025, and potential further expansion to 200 million gallons per year upon obtaining necessary permits, could significantly boost revenue through increased production levels.
  • The substantial completion of the One Earth Energy carbon capture and compression project is expected to enhance earnings by monetizing carbon credits or increasing the value of ethanol with lower carbon intensity, in anticipation of regulatory approvals and utility connections.
  • REX American's strategic position in ethanol exports, with export levels expected to surpass pre-pandemic volumes, could drive revenue growth as U.S. export demand strengthens, boosting overall sales.
  • The efficient and lean operations of REX’s ethanol facilities, coupled with improved corn pricing, are expected to sustain net margins and improve profitability, particularly as expansions are fully operational in the coming years.
  • The substantial cash reserves and debt-free status of the company provide financial flexibility to invest in ongoing and future growth projects, potentially increasing earnings and shareholder value through organic and strategic investments.

REX American Resources Earnings and Revenue Growth

REX American Resources Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming REX American Resources's revenue will grow by 9.9% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 10.1% today to 7.1% in 3 years time.
  • Analysts expect earnings to reach $63.7 million (and earnings per share of $3.51) by about January 2028, down from $67.6 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 19.0x on those 2028 earnings, up from 10.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.9x.
  • Analysts expect the number of shares outstanding to grow by 1.15% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

REX American Resources Future Earnings Per Share Growth

REX American Resources Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Delays in the expansion of the One Earth ethanol production facility and carbon capture projects could postpone expected increases in production capacity and earnings, affecting revenue growth.
  • Uncertainty surrounding federal policy changes, particularly the EPA's decision on blending mandates and potential revisions to the Inflation Reduction Act's 45Q tax credits, may impact revenue and net margins.
  • Declining average selling prices for ethanol and co-products, such as Dry Distiller Grain and corn oil, could reduce profit margins despite increased sales volumes.
  • The anticipated timelines for regulatory approvals of Class 6 injection wells and other permits necessary for the carbon capture projects may face delays, potentially affecting future revenue generation and earnings.
  • Increased selling, general, and administrative expenses, partly due to rising railcar leasing costs, could put pressure on net margins and overall profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $55.0 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 $892.5 million, earnings will come to $63.7 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 7.0%.
  • Given the current share price of $41.45, the analyst's price target of $55.0 is 24.6% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Analyst Price Target Fair Value
US$55.0
29.2% undervalued intrinsic discount
Future estimation in
PastFuture0893m2014201720202023202520262028Revenue US$892.5mEarnings US$63.7m
% p.a.
Decrease
Increase
Current revenue growth rate
4.12%
Oil and Gas revenue growth rate
8.81%