bloggingbuyouts

Take it Private! is a series looking at one company each week that, in my opinion, has no reason for being public. To find these companies, I screen for the following:

• high insider ownership
• a history of solid profitability
• a paltry Price/Earnings and/or Price/Cash Flow multiple
• a stagnant stock price accompanied by low volume indicating a lack of interest in the stock.

My purpose in highlighting these companies? This screen can be a good way to find deep value stocks, especially companies that may be attractive to a strategic buyer, private equity firm or management-led buyout at a premium to the current share price. However these profiles should not be interpreted as a recommendation to buy a certain stock. Let's take a look at Rex Stores (NASDAQ: RSC), a stock that I've followed with interest since 2004. Rex Stores owns and operates 111 electronics retail stores in 34 states, a business that has struggled in the face of lower-priced competitors from Best Buy (NASDAQ: BBY) to Wal-Mart (NYSE: WMT)

MicrocapTrader made a compelling and difficult to refute argument about the stock's value in this post from April of 2007: "In any event, assigning a proper valuation to RSC's property brings its tangible book value up to ~ $15 per share without even considering its inventory, worth another $6 per share at its carrying value."

And then there's the ethanol.

What's that you say? Ethanol? That's right. For years, Rex has aggressively invested a good chunk of the cash flow from its declining retail business in synthetic fuel and ethanol projects. There could be some risk there as the future of ethanol is uncertain but, historically, these investments have paid off well for Rex. In any case, at the current price of $11.50 per share, it looks like a free option: great if it does well but a few bad investments won't cause the company's value to drift below its current share price.

Rex has been buying back its own stock in the face of a declining share price and recently hired an investment bank to explore strategic alternatives for its retail segment. This is probably not the ideal time to sell given the current market environment. But with a price to book ratio of right around 0.5, this one seems ripe for a takeover, given the fact that is continues to be profitable.

Here's where it gets interesting: founder, chairman and CEO, Stuart Rose, owns 22.7% of the company's stock. Given how much of the stock he already he owns, it sure seems like he could raise the money to take it private without much trouble -- and take advantage of the the fact that the market has not given his company the respect it deserves.