REX American Resources (REX) Q2 2025 earnings review
Volume Grows but Profitability Collapses on Margin Squeeze
REX American Resources reported a 7% YoY revenue increase in Q2, driven by higher ethanol and co-product sales volumes, signaling a potential recovery in demand. However, this growth did not translate to the bottom line. Net Income plummeted 43% YoY to $7.1 million, and EPS fell 39% to $0.43, marking the fourth consecutive quarter of declining profits. The collapse was driven by severe margin compression from sharply lower distiller grain (DDG) prices and higher shipping costs. While management highlighted its 20th consecutive profitable quarter and announced a 2-for-1 stock split, the underlying earnings trend is decidedly negative, overshadowed by weak co-product markets.
🐂 Bull Case
Ethanol sales volumes rose 8.4% YoY, indicating healthy end-market demand. Management noted that exports are running approximately 10% ahead of 2024's record levels, providing a strong demand backdrop.
The company's key growth project, Carbon Capture and Sequestration (CCS), is progressing with a supportive legislative environment for 45Q/45Z tax credits. The EPA permit timeline was moved forward slightly to March 2026.
REX maintains a strong financial position with $310.5 million in cash and short-term investments and no bank debt, providing significant flexibility to fund its growth projects without external financing.
🐻 Bear Case
Gross profit fell 28% YoY to $14.3 million despite higher revenue, as the company was unable to offset a 13% drop in Dried Distiller Grain (DDG) prices and higher shipping costs. This signals a lack of pricing power in the current environment.
Net income has declined sequentially for four straight quarters, falling from $24.5 million in 24Q3 to just $7.1 million in 25Q2. The positive spin of '20 consecutive profitable quarters' masks a sharp negative trend in earnings quality.
For the first half of FY25, net cash from operating activities was only $12.8 million compared to net income of $20.0 million, indicating weakening cash conversion due to working capital headwinds.
⚖️ Verdict: 🔴
Bearish. The return to top-line volume growth is encouraging, but it is completely overshadowed by the collapse in profitability. The core business is facing significant margin pressure that volume alone cannot overcome. The long-term CCS project remains a key catalyst but is still far from contributing to earnings, leaving the currently weak and decelerating profit trend as the dominant factor for investors.
Key Themes
Co-Product Weakness Crushes Margins
The primary driver of the earnings miss was weakness in the co-product market, specifically Dried Distiller Grains (DDG). While ethanol prices were down a modest 2% YoY, average DDG selling prices fell 12.7%. The CFO explicitly cited this as the main reason for the gross profit decline from $19.8 million to $14.3 million YoY. Management commentary suggests weaker DDG export demand is a key factor.
Consistent Decline in Net Profit
While management emphasizes its streak of profitability, the absolute level of profit has been in a steep, consistent decline. Net income attributable to shareholders has fallen sequentially for four consecutive quarters: $24.5M (24Q3), $11.1M (24Q4), $8.7M (25Q1), and now $7.1M (25Q2). This trend indicates a fundamental deterioration in the company's earnings power over the past year.
Carbon Capture Project Remains Key Long-Term Catalyst
REX continues to invest in its strategic growth initiatives at the One Earth facility. The company has now invested $126.7 million of its $220-$230 million budget for the combined ethanol expansion and Carbon Capture and Sequestration (CCS) projects. The passage of supportive legislation for the 45Q/45Z tax credits de-risks the economics, and the EPA's permit decision timeline has been slightly accelerated to March 2026. This project is the central pillar of the long-term bull case for the company.
Strong Demand and Favorable Feedstock Outlook
Despite pricing weakness, physical demand for REX's products is robust. Ethanol and DDG volumes grew strongly YoY. Management is optimistic about the second half of the year, citing favorable market dynamics including a potential record U.S. corn harvest (which would lower input costs) and continued strong export demand for ethanol.
Stock Split Announced to Boost Liquidity
The Board of Directors declared a 2-for-1 stock split, intended to reward shareholders and increase trading liquidity after the stock recently traded at all-time highs. While this does not change the fundamental value of the company, it can improve accessibility for retail investors and signals management's confidence in the long-term outlook despite recent poor performance.
Other KPIs
The company ended the quarter with $310.5 million in cash, cash equivalents, and short-term investments, and no bank debt. This robust liquidity position is a key strength, allowing REX to fully fund its significant capital expenditure program for the CCS and expansion projects internally.
Net cash from operations of $12.8 million for the first six months of the year lagged Net Income of $20.0 million. The shortfall was driven by negative changes in working capital, including increases in accounts receivable and decreases in accounts payable. This represents a decline from the prior year's cash flow and warrants monitoring.
Corn oil was a bright spot among the company's products. Sales dollars increased by approximately 46% YoY, driven by both a 14% increase in volume sold and a 26% increase in average selling price. This strong performance partially offset the significant weakness seen in DDG prices.
Guidance
Mixed. Management stated that Q3 is on pace to 'outperform the second quarter but will not be as strong as our last year's third quarter.' This implies a sequential reversal from the declining profit trend (EPS > $0.43) but continued sharp YoY deceleration (EPS < $1.38). The guidance suggests improvement but confirms the company is far from its peak 2024 profitability levels.
Key Questions
Margin Bridge
Gross margins contracted significantly despite higher volumes. Can you quantify the impact from lower DDG prices versus higher shipping costs, and what proactive steps can you take to protect margins if co-product weakness persists?
Cash Flow Conversion
Operating cash flow for the first half was only 64% of net income. What is driving this weaker cash conversion, and should we expect this trend to continue in the second half of the year?
DDG Market Outlook
Given the significant negative impact from DDG prices this quarter, what is your outlook for the DDG export market for the remainder of the year, and are there signs of stabilization or recovery in pricing?