REX American Resources' Record Quarter Is Over Half a Tax Credit

REX American Resources just printed the highest second-quarter earnings in its history — $1.06 a diluted share, roughly five times the $0.22 a year ago. And yet the stock slipped in premarket trading. That combination is the whole story in a single frame: a record print that the market does not fully believe.

When a company posts record earnings and the shares do not celebrate, the market is usually telling you it does not think the number is the run-rate. So the useful question for a shareholder is not whether the quarter was strong — it clearly was — but how much of that $1.06 is a real business and how much is a government check. The answer decides what "record" is actually worth.

53 Cents of the Dollar

Start with the number that reframes everything. REX reported $34.9 million of net income attributable to its common shareholders in the fiscal second quarter (the three months ended July 31). Of that, $18.4 million came from the Section 45Z clean-fuel production tax credit, net of the cost to monetize it. Do the division and about 53 cents of every dollar of that quarter's profit was not a margin REX earned — it was a credit the U.S. government wrote it a check for.

For a reader who has not seen 45Z before: it is a per-gallon tax credit created by the Inflation Reduction Act that pays ethanol producers for fuel that is measurably lower in carbon than gasoline. The credit scales with how "clean" the gallon is, from a base of about 20 cents up to a dollar a gallon, and it flows straight into the company's gross profit. In dollar terms, that works out to roughly 26 cents a gallon of REX's consolidated ethanol this quarter — a fixed floor sitting underneath the actual crushing business.

That is the reason the top line and bottom line told two different stories. Revenue came in at $168.5 million, up 6% year over year but well below the roughly $195 million analysts had penciled in — the market was counting on more ethanol gallons than REX actually shipped, because its expansion is not online yet. But margins exploded: gross profit jumped from $14.3 million to $53.3 million, and the company's equity pickings from its four partner plants rose from $0.9 million to $7.2 million. The revenue "miss" is a volume-and-timing print; the earnings "beat" is a margin-and-credit print. Those are not the same thing, and conflating them is how the premarket dip happened.

The Part That Is Not a Credit

Here is where I would push back on the read that this is all subsidy. Strip out the $18.4 million of 45Z income and the underlying gross profit was still up about 144% year over year. The drivers are ordinary, auditable crush margins: the company's dried distillers grains (a cattle-feed byproduct) sold for $166.55 a ton versus $143.63 a year ago, its distillers corn oil for $0.72 a pound versus $0.54, and its ethanol for $1.78 a gallon net of hedging. Volumes were flat — 70.6 million consolidated gallons, the same as the prior year — so the improvement came from price and co-product economics, not from shipping more.

That matters because a quarter built on a one-off commodity pop can roll back just as fast. REX's core here recovered off a genuinely weak prior-year print, and management pointed to rising ethanol exports (up roughly 13% in the first half) as the backdrop. The 45Z is a large and very real layer on top of a crush business that is itself improving — not a mask over one that is not.

One wrinkle the careful reader should keep in view: selling, general and administrative expense nearly tripled, from $6.2 million to $15.6 million, mostly from higher incentive compensation and stock awards tied to the company's own performance. That is the cost of doing well, and part of it is non-cash, but it is a reminder that a record quarter also raises the bar for the next one.

Why the Market Trades It at 44x Forward

From a valuation perspective, the clearest signal is not the trailing multiple — REX trades at about 12 times trailing earnings and roughly 8 times trailing EBITDA, with no dividend to anchor it. It is the gap between what the stock costs on trailing earnings and what it costs on forward earnings. Trailing, the multiple is around 12x. On the forward numbers the market has modeled, it stretches to the mid-40s.

A multiple that nearly quadruples from trailing to forward is the market's way of saying these record earnings are the ceiling, not the floor. The skepticism is not crazy, and it rests on two concrete legs.

First, the credit is policy, not permanence. 45Z is extended through fuel sold by the end of 2029 under the One Big Beautiful Bill — so it is not expiring next year, which matters and cuts against the "windfall about to vanish" story. But it is a line in a statute that has already been changed once, and every gallon's value depends on a carbon-intensity score the regulators are still fine-tuning.

Second, the biggest upside in the number is not built yet. REX's single largest option is its carbon-capture project at the Gibson City plant. Capturing and sequestering the CO2 would lower the plant's carbon-intensity score and, management says, could roughly double the per-gallon credit from today's ~26 cents toward about 55 cents. That is not a small add to a $1.06 quarter — it is the difference between a subsidy and a structural cost advantage. But it is still in permits: the EPA issued only draft injection-well permits in mid-August, Illinois's sequestration moratorium just lapsed, and the company itself calls a five-mile connector-pipeline approval the step likely to take the longest. The market prices it at zero, which is why the forward multiple looks ugly. If you believe the permits clear on a 2027 timeline, the forward earnings the street has modeled are too low. If you believe they stall, the credit stays at 26 cents.

The Balance Sheet Does the Heavy Lifting

Now the part that separates this from most of the sector I cover. Survival is not the question here, and it is the reason the cheapness on the trailing multiple is not a value trap. REX carries no bank debt. It ended the quarter with $379.5 million in cash and short-term investments and no bank debt — a net-cash balance sheet, not a stretched one. It is funding the $191.2 million of capex already poured into the ethanol expansion and carbon-capture projects from its own balance sheet, not from a lender who could call it in on a downturn. That is the margin of safety, and it is real.

Which is what this is, all told. Not a distressed deep-value name, and not a pure commodity trade. A debt-free cash-flow business that is paying about 10% of its own market value back in operating cash flow every year, whose record quarter is more than half a tax credit, and whose whole forward case hinges on a policy line extended to 2029 and an unbuilt project that could double it. The stock is already up roughly 31% this year, so much of the good news is done. The contrarian crack — the market pricing a "not repeatable" quarter that is closer to a floor than a ceiling — only opens if you are comfortable that a government credit and a permitting process are load-bearing, not decorative. If they are, the mid-40s forward multiple is the discount. If they are not, 12 times trailing is the honest number. Either way, the reader should now know exactly which leg of the chair the price is resting on.