Seeking Alpha
Value, long only, debt, research analyst
Profile| Send Message| ()  

As the U.S. housing market has been recovering from the 2008 - 2009 recessionary lows this has provided many investment opportunities. One company that is situated in an industry poised to capitalize on the U.S. housing recovery is Rayonier Inc. (RYN).

Rayonier Inc. is an international forest products company. It is engaged in activities associated with timberland management, sale and entitlement of real estate, and production and sale of high value specialty cellulose fibers and fluff pulp.

In the section below, I will analyze the past four performances of the company. I will look at Rayonier's past profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

All numbers sourced from Morningstar and the company website.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2008 = $152 million.
  • Net income 2009 = $313 million.
  • Net income 2010 = $218 million
  • Net income 2011 = $276 million.
  • Net income 2012 = $279 million.

Over the past five years Rayonier's net profits have increased from $152 million in 2008 to $279 million in 2012. This illustrates an increase of 83.55%.

  • Operating income 2008 = $223 million.
  • Operating income 2009 = $412 million.
  • Operating income 2010 = $269 million.
  • Operating income 2011 = $356 million.
  • Operating income 2012 = $411 million.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Like the net income Rayonier's operating income has also increased. Over the past five years, the company's operating income has increased from $223 million to $411 million.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2008 = $152 million.
    • Net income 2009 = $313 million.
    • Net income 2010 = $218 million
    • Net income 2011 = $276 million.
    • Net income 2012 = $279 million.
  • Total asset growth

    • Total assets 2008 = $2.091 billion.
    • Total assets 2009 = $2.253 billion.
    • Total assets 2010 = $2.364 billion.
    • Total assets 2011 = $2.569 billion.
    • Total assets 2012 = $3.123 billion.
  • ROA - Return on assets

    • Return on assets 2008 = 7.27%.
    • Return on assets 2009 = 13.89%
    • Return on assets 2010 = 9.22%
    • Return on assets 2011 = 10.74%.
    • Return on assets 2012 = 8.93%.

Over the past five years, Rayonier's ROA has increased from 7.27% in 2008 to 8.93% in 2012. This indicates that the company is making more money on its assets than it did in 2008.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2008

  • Operating income 2008 = $223 million.
  • Net income 2008 = $152 million.

2009

  • Operating income 2009 = $412 million.
  • Net income 2009 = $313 million.

2010

  • Operating income 2010 = $269 million.
  • Net income 2010 = $218 million.

2011

  • Operating income 2011 = $276 million.
  • Net income 2011 = $276 million.

2012

  • Operating income 2012 = $411 million.
  • Net income 2012 = $279 million.

Over the past five years, the operating income has been higher than the net income. This indicates that Rayonier is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2008 = $2.091 billion.
    • Total assets 2009 = $2.253 billion.
    • Total assets 2010 = $2.364 billion.
    • Total assets 2011 = $2.569 billion.
    • Total assets 2012 = $3.123 billion.
    • Equals and increase of $1.032 billion
  • Total liabilities

    • Total liabilities 2008 = $1.167 billion.
    • Total liabilities 2009 = $1.107 billion.
    • Total liabilities 2010 = $1.112 billion.
    • Total liabilities 2011 = $1.246 billion.
    • Total liabilities 2012 = $1.685 billion.
    • Equals an increase of $518 million

Over the past five years, Rayonier has increased its total assets more than its total liabilities. This indicates that the company has not been financing its assets through debt. Over the past four years, the company's total assets have increased by $1.032 billion, while the total liabilities have increased by $518 million.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2009 = $327 million
    • Current assets 2009 = $510 million
    • Current assets 2010 = $609 million
    • Current assets 2011 = $345 million
    • Current assets 2012 = $566 million
  • Current liabilities

    • Current liabilities 2009 = $163 million
    • Current liabilities 2009 = $175 million.
    • Current liabilities 2010 = $245 million
    • Current liabilities 2011 = $178 million.
    • Current liabilities 2012 = $308 million
  • Current ratio 2008 = 2.01
  • Current ratio 2009 = 2.91
  • Current ratio 2010 = 2.49
  • Current ratio 2011 = 1.94.
  • Current ratio 2012 = 1.84.

Over the past five years, Rayonier's current ratio has decreased from 2.01 in 2008 to 1.84 in 2012. The number has declined over the past five years but as the ratio is above 1, this indicates that the company would be able to pay off its obligations if they came due at this point. This indicates financial strength.

Common Shares Outstanding

  • 2008 shares outstanding = 118 million.
  • 2009 shares outstanding = 119 million
  • 2010 shares outstanding = 120 million.
  • 2011 shares outstanding = 122 million.
  • 2012 shares outstanding = 123 million.

Over the past five years, the number of company shares has increased. The amount of common shares has increased from 118 million in 2008 to 123 million in 2012. This signifies a 4.24% increase over the past five years.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2008 = $278 million / $1.232 billion = 22.56%.
  • Gross margin 2009 = $254 million / $1.169 billion = 21.73%.
  • Gross margin 2010 = $325 million / $1.315 billion = 24.71%.
  • Gross margin 2011 = $415 million / $1.489 billion = 27.87%.
  • Gross margin 2012 = $466 million / $1.571 billion = 29.66%.

Over the past five years, Rayonier's gross margin has increased. The ratio has increased from 22.56% in 2008 to 29.66% in 2012. As the margin has increased, this indicates that Rayonier has been more efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2008 = $1.232 billion.
    • Revenue 2009 = $1.169 billion
    • Revenue 2010 = $1.315 billion.
    • Revenue 2011 = $1.489 billion.
    • Revenue 2012 = $1.571 billion
    • Equals an increase of 27.52%.
  • Total Asset growth

    • Total assets 2008 = $2.091 billion.
    • Total assets 2009 = $2.253 billion.
    • Total assets 2010 = $2.364 billion.
    • Total assets 2011 = $2.569 billion.
    • Total assets 2012 = $3.123 billion.
    • Equals and increase of 49.35%.

As the revenue growth has increased by 27.52% while the assets have increased by 49.35%, this indicates that revenue growth has not kept up with asset growth. This will be something to keep an eye on over the next couple of years.

Based on the fundamentals above, Rayonier is showing very good results. Over the past five years, the company is showing strength in all areas except for the Asset Turnover. The asset turnover indicates that the company's revenues have not kept up with the increase in the company's assets. As we are early in the U.S. housing recovery this will be something to watch moving forward. Based on the above criteria, Rayonier is showing that it has been gaining strength from a fundamental point of view over the past five years.

Looking Forward

There are many reasons to believe that the U.S. housing market increase will continue. Some of these reasons are improving consumer confidence, low interest rates and affordable prices. Also adding to the recovery is the supply of available homes for sale remains relatively low. These factors have contributed to the average price of homes rising nearly 10 percent in January 2013, compared with 12 months earlier. According to an article posted by Time Magazine this is "the biggest increase in nearly seven years."

In a recent article issued by the financial post Samantha McLemore of Legg Mason Capital Management Opportunity Trust states: "We still think we are in the early innings of a prolonged recovery in housing and the economy." This sentiment is reiterated by JPMorgan (JPM) as they predict "U.S. home price gaining 7% in 2013 and predicts more than 14% increase through 2015". Bank of America (BAC) increased their estimates for housing in 2013 by stating "values will jump 8% this year" which is up from a prior estimate of 4.7%.

As the U.S. housing market increases this will have a positive impact on Rayonier's bottom line.

Analysts' Estimates

Analysts at MSN Money are estimating a strong year for 2013 and the growth to continue in 2014. EPS estimates for FY 2013 are $2.17 while growth is expected to continue into 2014 as EPS estimates increase to $2.74. Bloomberg Businessweek supports this idea as they expect the company's revenues to be around $1.6 billion for FY 2013 and increase to $1.7 billion for FY 2014.

Price Targets

  • Finviz has a price target for Rayonier at $56.25.
  • Recently, RBC Capital Markets gave the company a "Market Perform" rating. They currently have a target of $55.00 on the company.

Over the past couple of years, the average P/E ratio for Rayonier Inc. has been 17.86. As the company has averaged a P/E of 17.86 and is expected to have an EPS in 2014 of approximately $2.74, this would give the stock a price target of around $48.95.

As the U.S housing recovery continues to progress, companies in the lumber industry will benefit. As the need for new buildings and people spending money on upgrading and repairing their current homes increases, Rayonier is positioned well to capitalize on this trend. Currently, analysts have a $55.00 price target on the stock.

Valuation

B. Annual growth rate

  • EPS 2008 = $1.27
  • EPS 2009 = $2.61
  • EPS 2010 = $1.79
  • EPS 2011 = $2.20
  • EPS 2012 = $2.17
  • EPS 2013 = $2.17 (Estimate)
  • EPS 2014 = $2.74 (Estimate)

(A / P) ^ (1 / T) - 1 = R

(2.74 / 1.27) ^ (1 / 7) - 1 = R

R = 11.61%

Earnings per share average growth rate over the 5 past years and estimated 2 years forward = 11.61%

Current PE Ratio = 26.44 (Google Finance)

26.44 / 11.61 = 2.28

PEG Ratio = 2.28

A current PEG ratio of 2.28 based on an EPS average growth rate from 2008 to 2014 indicates that based on the next few years estimates the stock is currently at overvalued. This overvalue could also be an example of the industry being a place where many other investors want to be.

Over the past few weeks the stock price has come off its recent highs. This is supported by a peg ratio that is well over 1. If patience is exercised over the next few months, there should be an excellent opportunity to buy a company with an solid balance sheet, a strong dividend that is currently over 3%, in a industry that is poised for growth based on a U.S. housing recovery.

Source: Rayonier Inc.: Put This Opportunity On Your Radar