One of my favorite stocks for this year is one of the largest private landowners in the United States. Operating as a real estate investment trust, the company is Rayonier (RYN), and it specializes in growing and managing timber across its 2.6 million acres in the United States and New Zealand.
It also has non-timber interests that have not weighed it down much, including a real estate unit called TerraPointe that manages 100,000 acres in coastal communities from Savannah, Georgia, to Daytona Beach, Florida.
Timber is a strange and unique commodity. Like oil and gas, extraction can be put off until prices rise. But unlike those two, the inventory actually grows in the meantime — becoming more valuable as trees thicken. So a company has to be able to capitalize on this optionality by having a multitude of ways of selling it into various channels at different points in the economic cycle. Rayonier mostly sells its timber at auctions where its own lumber mills bid at the same time as outside mills. This is a clever distinction from other forestry firms that grow trees simply to feed into their own mills, a situation that can lead to badly distorted prices and priorities.
Analysts report that Rayonier’s timber properties — mostly in Florida, Georgia and Washington — have for this and other reasons been much more productive and efficient than those of competitors like Plum Creek (PCL). The company’s ability to sell cellulose as well as logs has also made distinguished it, as customers use a purified form of the fibers in industrial applications ranging from clothing to cigarette filters. South American companies like Fibria Celulose (FBR) of Brazil compete in this market, but RYN holds its own.
RYN has been managed for three years by Lee Thomas, former head of Georgia Pacific and an EPA administrator under President Reagan. He has done a good job of creating value by diversifying smartly away from the home construction market, and converting the company to a dividend-paying REIT. The fiber business has really helped RYN through the tough times in construction, and has left the company in strong financial shape — with little debt, and plenty of cash flow — to take advantage of any rebound in that industry that lies ahead over the next couple of years.
Lumber prices have been skyrocketing — up 40% this year — and RYN has been a prime beneficiary. And that is why it and its peers have done so well this year despite as seemingly weak market for lumber for home construction. Expectations for lumber were so low that very little was harvested in the past year, so just a small uptick in demand has shot prices higher.
The consensus is looking for RYN to earn $1.83 in fiscal 2010 and $2.08 in fiscal 2011, which both look low to me. They put the forward price/earnings multiple at 21, which reflects the company’s status as market leader. Earnings will be reported April 27. With a dividend yield is 4.7% adding to the capital appreciation, RYN is a great long-term hold.
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