Rex’s Earnings Vanish; Assets Remain
(RX)(PGN)
By Geoff Gannon
Shares of Rex Stores (RSC) are down nearly 8% in today’s trading. This decline extends Friday’s fall-off following Rex’s disappointing earnings release.
Net income for the quarter came in at $1.5 million or $0.13 per diluted share vs. $6.1 million or $0.48 per diluted share during the year ago period. Net sales dropped to $86.1 million from $87.9 million during the year-ago period, despite a 0.5% increase in same-store sales.
The decline in net sales was primarily the result of store closings. Rex has continually closed stores over the past few years. The decline in net income was primarily the result of a drop in Rex’s synthetic fuel investment income. Income from limited partnership investments was $2.1 million in the first quarter vs. $6 million in the year ago period.
The sharp sell-off is likely the result of news from Progressive Energy (PGN), Rex’s partner in its Colona synthetic fuel investment, that production at the fuel facilities has ceased in anticipation of the reduction or phase-out of Section 29/45K tax credits. Synthetic fuel credits are phased out if oil prices reach certain levels.
Rex had always been aware of the possible phase-out, but hadn’t previously stated that it did not expect to receive any additional income from the sale of its synthetic fuel interests. Last week, Rex’s Chairman and CEO, Stuart Rose, acknowledged that Rex no longer expected additional income from the synfuel investments.
The market’s violent reaction to Rex’s first-quarter results and the synfuel announcement is entirely overdone. Such a reaction would have been appropriate if the market had been valuing Rex on an earnings power basis with the expectation that income from the sale of the synfuel partnership interests would have continued at the same level as a year ago.
But, that was never the expectation. In the first quarter of 2006, shares of Rex stores were trading at less than seven times last year’s earnings. Obviously, the stock was not being valued on the basis of last year’s earnings.
Even a year ago, the majority of the value in Rex Stores was not derived from the income received from the sale of the company’s LP interests. For several years now, Rex Stores has been an asset play. The company has substantial real estate holdings (largely unmortgaged) spread across many different states.
In addition to its many real properties, the company still has both state NOL tax credits - and much more importantly, federal AMT credits. The credits are largely the result of the synfuel investments. While the value of the company’s real estate is difficult to value, the fact that Rex has managed to halve its total liabilities in less than five years has created an interesting opportunity in the company’s common stock.
Shares of Rex Stores currently trade at about 75% of book. The book value of the company’s assets is less inflated than the book value of the assets of most public corporations. Even if the retail chain merely managed to break even, shares of Rex Stores would not be overvalued at current levels. So, why all the selling?
Part of the problem may be speculators. Recently, Rex has been making investments in ethanol. Earlier this year, shares of Rex Stores had risen suddenly when the company’s interest in ethanol became more widely known.
For long-term shareholders, the transition from synfuel investments to ethanol investments was not unexpected. However, Rex Stores was not particularly well known outside of investors who hunt for such book value bargains. The public’s interest in ethanol and its new found knowledge of this small, rather obscure electronics retailer may be the reason for the recent wild ride – both on the way up and on the way down Of course, it remains to be seen if steadier hands (particularly value-oriented funds) are taking part in the selling, or are staying on the sidelines.
Geoff Gannon's site is www.gannononinvesting.com
By Geoff Gannon
Shares of Rex Stores (RSC) are down nearly 8% in today’s trading. This decline extends Friday’s fall-off following Rex’s disappointing earnings release.
Net income for the quarter came in at $1.5 million or $0.13 per diluted share vs. $6.1 million or $0.48 per diluted share during the year ago period. Net sales dropped to $86.1 million from $87.9 million during the year-ago period, despite a 0.5% increase in same-store sales.
The decline in net sales was primarily the result of store closings. Rex has continually closed stores over the past few years. The decline in net income was primarily the result of a drop in Rex’s synthetic fuel investment income. Income from limited partnership investments was $2.1 million in the first quarter vs. $6 million in the year ago period.
The sharp sell-off is likely the result of news from Progressive Energy (PGN), Rex’s partner in its Colona synthetic fuel investment, that production at the fuel facilities has ceased in anticipation of the reduction or phase-out of Section 29/45K tax credits. Synthetic fuel credits are phased out if oil prices reach certain levels.
Rex had always been aware of the possible phase-out, but hadn’t previously stated that it did not expect to receive any additional income from the sale of its synthetic fuel interests. Last week, Rex’s Chairman and CEO, Stuart Rose, acknowledged that Rex no longer expected additional income from the synfuel investments.
The market’s violent reaction to Rex’s first-quarter results and the synfuel announcement is entirely overdone. Such a reaction would have been appropriate if the market had been valuing Rex on an earnings power basis with the expectation that income from the sale of the synfuel partnership interests would have continued at the same level as a year ago.
But, that was never the expectation. In the first quarter of 2006, shares of Rex stores were trading at less than seven times last year’s earnings. Obviously, the stock was not being valued on the basis of last year’s earnings.
Even a year ago, the majority of the value in Rex Stores was not derived from the income received from the sale of the company’s LP interests. For several years now, Rex Stores has been an asset play. The company has substantial real estate holdings (largely unmortgaged) spread across many different states.
In addition to its many real properties, the company still has both state NOL tax credits - and much more importantly, federal AMT credits. The credits are largely the result of the synfuel investments. While the value of the company’s real estate is difficult to value, the fact that Rex has managed to halve its total liabilities in less than five years has created an interesting opportunity in the company’s common stock.
Shares of Rex Stores currently trade at about 75% of book. The book value of the company’s assets is less inflated than the book value of the assets of most public corporations. Even if the retail chain merely managed to break even, shares of Rex Stores would not be overvalued at current levels. So, why all the selling?
Part of the problem may be speculators. Recently, Rex has been making investments in ethanol. Earlier this year, shares of Rex Stores had risen suddenly when the company’s interest in ethanol became more widely known.
For long-term shareholders, the transition from synfuel investments to ethanol investments was not unexpected. However, Rex Stores was not particularly well known outside of investors who hunt for such book value bargains. The public’s interest in ethanol and its new found knowledge of this small, rather obscure electronics retailer may be the reason for the recent wild ride – both on the way up and on the way down Of course, it remains to be seen if steadier hands (particularly value-oriented funds) are taking part in the selling, or are staying on the sidelines.
Geoff Gannon's site is www.gannononinvesting.com
posted by douglas mcintyre at 2:30 PM
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