The last few quarters have been good to specialty electronics retailer REX Stores (NYSE:RSC), which has taken maximum advantage of federal tax breaks for investments in synthetic fuels. But is that the full story? Perhaps it is, but it's not this Fool's story. Today we take a sneak peek at the company's Q4 and full-year 2005 earnings report, due out tomorrow morning, and at a few key metrics suggesting that REX would be rebounding even without its tax rebates.

Wall Street Wisdom:

  • General consensus. Exactly one analyst follows REX, and even he doesn't seem enthusiastic about it; he only rates the stock a hold.
  • Revenues. Tomorrow's Q4 sales are predicted to come in 3% above the 2004 number.
  • Earnings. Profits, in contrast, are expected to come in 39% lower, at $0.79 per share.

Margin watch:
That result refers to REX's net profits. As you can see from the chart below, REX's net margins have been coming in stronger than its operating margin over the past four quarters -- a result of an $8 million tax benefit recorded in the year-ago quarter. That benefit will, of course, fall off the "old" end of the rolling margin results when tomorrow's numbers come out.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

28.8

28.1

27.9

27.5

27.7

27.9

Op.

7.6

7.2

6.2

6.5

8.2

9.4

Net

7.3

7.2

7

7.5

8.9

9.6

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
The good news is that REX has been growing its pre-tax-benefit gross and operating margins over the past two and three quarters, respectively. The better news is that in addition to these margins, which measure the profitability of REX's core retail business, the company has a steady stream of additional income coming in from its synthetic fuel investments. At $18.8 million over the last six months, these extra profits are nine times as large as the core business's operating profits. And although they're characterized as "unusual items," the synthetic fuel profits are actually pretty dependable -- they began arriving in 1999 and have been consistently profitable since mid-2001.

Foolish sum-up:
It looks like they'll keep on coming, too. In January, REX announced yet another synthetic fuel investment, this time in an ethanol plant. Put it all together, and what we have here is a marginally profitable electronics retailer (but really, when you're competing with Best Buy (NYSE:BBY), Circuit City (NYSE:CC), and Wal-Mart (NYSE:WMT), even "marginal" deserves a medal) with a serious, successful, and sustained commitment to profiting from the ongoing energy crisis. And the whole package sells for just five times trailing earnings, and nine times forward earnings.

Best Buy is a Motley Fool Stock Advisor pick.

Fool contributor Rich Smith does not own shares of any company named above.