High-Yielding Rayonier Gets Chopped Down After Earnings

Apr.30.14 | About: Rayonier Inc. (RYN)

Summary

Revenues and earnings decreased from last year and last quarter.

The company continues to plan the spin-off of the Performance Fibers segment of the business by the middle part of this year.

The stock is fairly valued on 2015 earnings estimates.

The last time I wrote about Rayonier Inc. (NYSE:RYN), I stated:

"Due to deteriorating financial ratios, bearish technicals, and fair valuation based on next year's earnings I will not be pulling the trigger on this name right now." Since that article was published the stock is down 2.2% while the S&P 500 (NYSEARCA:SPY) is up 0.71%. Rayonier is compared to real estate investment trusts and is an international forest products company primarily engaged in activities associated with timberland management, the sale and entitlement of real estate, and the production and sale of specialty cellulose fibers and fluff pulp.

The company reported earnings before the market opened on 29Apr14 and on the surface the results were horrible with the company reporting earnings of $0.36 per share (missing estimates by $0.09) on revenue of $386.7 million (missing estimates by $13.8 million). The stock dropped a whopping 3.27% on the back of earnings. What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (millions of dollars)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Forest Resources

$ 104.7

$ 104.6

$ 57.1

0%

83%

Real Estate

$ 5.5

$ 97.2

$ 24.3

-94%

-77%

Performance Fibers

$ 241.8

$ 280.6

$ 284.2

-14%

-15%

Cellulose specialties

$ 206.5

$ 249.9

$ 246.9

-17%

-16%

Viscose/other

$ 25.1

$ 24.2

$ -

4%

N/A

Absorbent materials

$ 10.2

$ 6.5

$ 37.3

57%

-73%

Other Operations

$ 37.4

$ 40.4

$ 28.2

-7%

33%

Intersegment eliminations

$ (2.7)

$ (2.6)

$ (0.1)

4%

2600%

Total

$ 386.7

$ 520.2

$ 393.7

-26%

-2%

Click to enlarge

At first glance the segment revenue section of the earnings report doesn't seem all too bad with a 2% decrease in revenue, albeit I only like increases in revenues but am willing to forego a small drop. So let's delve into the weeds to figure out the details. The Forest Resources segment of the business which accounts for 27% of the business increased revenues by 83%! The company took advantage of strong export markets in the Pacific Northwest and New Zealand by realizing higher timber prices in the South.

The Real Estate portion of the business which accounts for 1% of revenues dropped significantly but didn't affect the top line much. The company said traffic was lower due to the weather as well as the timing of closings. Other operations which account for about 10% of revenues increased revenues by 33%.

The Performance Fibers business segment which will be spun off later in the year has a 15% drop in revenues. This segment accounts for 63% of revenues and successfully qualified production from the converted line with major cellulose specialties customers.

Income Statement

Income Statement (millions of dollars)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Sales

$ 386.7

$ 520.2

$ 393.7

-26%

-2%

Cost of Sales

$ 302.7

$ 395.4

$ 266.0

-23%

14%

Selling and general expenses

$ 15.5

$ 16.5

$ 16.1

-6%

-4%

Other operating expense, net

$ 3.5

$ (4.9)

$ (3.8)

-171%

-192%

Operating Income

$ 65.0

$ 113.2

$ 115.4

-43%

-44%

Interest expense

$ (13.0)

$ (13.0)

$ (7.7)

0%

69%

Interest and miscellaneous income, net

$ (1.0)

$ 0.5

$ -

-300%

#DIV/0!

Income from continuing operations before taxes

$ 51.0

$ 100.7

$ 107.7

-49%

-53%

Income tax expense

$ (7.7)

$ (18.5)

$ (4.4)

-58%

75%

Income from continuing operations

$ 43.3

$ 82.2

$ 103.3

-47%

-58%

Income from discontinued operations, net

$ -

$ (2.4)

$ 44.4

-100%

-100%

Net income

$ 43.3

$ 79.8

$ 147.7

-46%

-71%

Less net income attributable to noncontrolling interest

$ (0.1)

$ 0.1

$ -

-200%

#DIV/0!

Non-GAAP discontinued operations, net

$ -

$ 2.4

$ (44.4)

-100%

-100%

Non-GAAP separation costs, net

$ 2.7

$ 1.3

$ -

108%

#DIV/0!

Net income attributable to Rayonier

$ 46.1

$ 83.4

$ 103.3

-45%

-55%

Avg. Diluted Shares

128,424,493

128,949,778

130,436,888

0%

-2%

Earnings per diluted share

$ 0.36

$ 0.65

$ 0.79

-44%

-55%

Click to enlarge

With a slight drop in revenues I'd like to examine the income statement now to see if it affected the bottom line much. Immediately I see a 14% increase in cost of sales which ended up knocking operating income down 44% from last year. Interest expenses increased 69% making income from continuing operations before taxes decrease 53%. Income taxes increased 75% making income from continuing operations decrease 58%. It feels like a snowball just keeps getting bigger as we continue to go down the lines. Income from discontinued operations was completely eliminated from last year making net income decrease 71%. After factoring in non-GAAP items and a 2% reduction in shares we got a 55% reduction in earnings from last year.

Balance Sheet

Balance Sheet (millions of dollars)

1Q14

4Q13

Q/Q

Cash and cash equivalents

$ 156.1

$ 199.6

-22%

Other current assets

$ 339.7

$ 319.5

6%

Timber and timberlands, net of depletion and amortization

$ 2,069.5

$ 2,049.4

1%

Property, plant and equipment

$ 1,999.0

$ 1,981.1

1%

Less-accumulated depreciation

$ (1,137.0)

$ (1,120.3)

1%

Net property, plant and equipment

$ 862.0

$ 860.8

0%

Other assets

$ 217.5

$ 256.2

-15%

Total Assets

$ 3,644.8

$ 3,685.5

-1%

Current maturities of long-term debt

$ 114.3

$ 112.5

2%

Other current liabilities

$ 183.2

$ 163.6

12%

Long-term debt

$ 1,393.9

$ 1,461.7

-5%

Non-current liabilities for dispositions and discontinued operations

$ 67.5

$ 69.5

-3%

Other non-current liabilities

$ 126.3

$ 122.9

3%

Total Liabilities

$ 1,885.2

$ 1,930.2

-2%

Click to enlarge

Looking at the balance sheet we immediately see a 22% reduction in cash and equivalents but that total assets only decreased by 1%. Looking at the liability side of the equation there was a 12% increase in other current liabilities but a decrease of 2% in total liabilities.

Conclusion

The company reported earnings which were 55% lower than a year ago on 2% less revenue while the share price was up 0.84% since the last earnings call excluding dividends. Revenues decreased, earnings decreased, and the balance sheet was status quo. The company expects Forest Resources is on pace to beat results from 2013 while Real Estate is anticipated to be on par with last year. The Performance Fibers segment is expected to fall short when compared to 2013 due to higher costs during this quarter. The share count decreased 2% from the prior year. The results were horrible to me and so was guidance, and investors seem to think they were too as the stock dropped 3.27% after reporting while the S&P500 was up 0.48%. That being said, I think the stock is fairly valued and expectations have been re-set. With these results the stock is on the trading block after the stock split.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long RYN, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.