Timber! The Long Case for Rayonier

| About: Rayonier Inc. (RYN)

On October 23rd I highlighted Rayonier Inc. (NYSE:RYN) for its timberland assets. Since then, the stock has barely moved and yet it is still attractive. Here's why:

* Rayonier owns 1.6 million acres of timberland in the southeastern US. The University of Florida’s Food and Resource Economics Department, which issues the annual land-value survey, values timberland in Northeast Florida as worth $3,864 per acre. RYN also owns about 400K acres in the Pacific Northwest, which, at $2K an acre, is worth approximately $800 million.

* RYN currently has a market cap of $3.1 billion, whereas I've calculated that the liquidation value of it's 1.6 mil acres, at $3K/acre, is $4.8 billion. Let's say that timber will fall in price so that its 1.6mil acres, at $2,500/acre, will be worth $4 billion. This figure still ignores all its other businesses, and its land in Australia and New Zealand.

I believe that the Street is valuing the stock like that because:

1) RYN has no earnings leverage to commodity paper prices, hence if paper prices were to rally, Rayonier could under-perform its paper-heavy peers.

2) "The street" is valuing Rayonier at roughly $2K per US acre, assuming its international operations in Australia & New Zealand, real estate, and paper mills are worthless.

3) As of late, housing starts are falling, which positively correlates with lumber futures/prices. Similarly, lumber & timber have a positive correlation. Hence, if housing market dwindles so does lumber & timberland. Hence the cheaper valuation.

4) RYN's exposure to Florida & portfolio of properties close to the beach in the southeastern US could raise fear of hurricanes, (which now seem to be subdued).

5) On Oct. 25th, management's outlook was mediocre (at least according to me). RYN expects 4Q results to be less than the 3Q due to a drop in real estate sales.

I recommended getting into Toll Brothers, Inc. (NYSE:TOL) back when it reported in August (24 then, 28 now) because, in my opinion, the time to rotate back into housing and timber REITS/stocks is before the next Fed cut.

Yesterday The Home Depot, Inc. (NYSE:HD) rose even after it lowered guidance and missed estimates by 2 cents, because the Street believes that the next Fed move will be to cut rates.

In closing, I believe timber is a great investment and that the best stock to make it with is RYN. Why? From 1972-2001, an investor in timber saw average annual returns of over 14.5%. In other words, if you had invested $10,000 in timber in 1972, you'd be sitting on over half a million dollars right now. RYN is a great timber investment because of stable business, long-term out-performance of timber, attractive properties, almost 5% dividend yield & most importantly- the valuation. RYN trades at a 20% EV/EBITDA discount to PCL, and as I mentioned in the last post, I believe its (timber) land is also undervalued.

RYN 1-yr chart

RYN 1-yr performance chart

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