Electronics retailer REX Stores
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
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.
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