Electronics retailer REX Stores (NYSE:RSC) may still be a long shot, and it may fall short of the Best Buy (NYSE:BBY) standard, but that hasn't stopped investors from picking up shares. After the release of its second-quarter results, its stock moved up 3% in recent trading.
The big headline? Earnings per share (EPS) increased a whopping 169% year over year, to $0.70. Unfortunately, this sterling net income growth was not attributable to an accelerating top line. Net sales and same-store sales actually declined 1%. Operating margins didn't help much either, slipping slightly to remain below 1%.
Still, you can't pull triple-digit earnings growth out of a hat. Where did the income come from? If you look below the operating income, you'll find a line item labeled "Income From Synthetic Fuel Investments." In the late 1990s, and again in 2002, the company entered into a few limited partnerships in synthetic fuel to earn federal income tax credits. In the latest quarter, REX earned $10.4 million from these investments.
Because of this investment income, it now has a trailing-12-month EPS of $2.92. Taking into account the company's recent trading, this enterprise is valued at a very low five times earnings. Of course, the company's sluggish sales growth may be one reason for this deep discount.
REX's strategy is to focus its stores in small and medium-sized markets. You won't see it in every major metropolitan area, like Motley Fool Stock Advisor pick Best Buy or Circuit City (NYSE:CC), and its bulk value strategy won't pit it against specialists like Radio Shack (NYSE:RSH). But value-minded shoppers do have other options, including Wal-Mart (NYSE:WMT) and Stock Advisor pick Costco (NASDAQ:COST).
Given these choices, it's tough to see how REX can get the growth wheel spinning. Its shares are trading at a very reasonable level, but its upside potential will remain capped until sales begin accelerating.
For more on the competition, check out these articles:
Costco and Best Buy are Motley Fool Stock Advisor picks. For more stellar stocks from Tom and David Gardner, sign up today for a free 30-day trial subscription.
Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.
