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Bear of the Day: Rayonier (RYN)

Todd Bunton

Earnings estimates continue to fall for Rayonier (RYN). Analysts first lowered their estimates after the company delivered disappointing Q3 results. And they continued to revise their estimates lower after Rayonier warned about a price drop in one of its largest products.

Rayonier is a Zacks Rank #5 (Strong Sell) stock.

While shares have come down considerably over the last several weeks, the stock still does not look like a value at more than 20x forward earnings. Investors should consider avoiding this stock until its earnings momentum improves.

A REIT...Sort Of

Rayonier is structured as a Real Estate Investment Trust (:REIT). Its owns, leases or manages approximately 2.7 million acres of timberland across 9 U.S. states and New Zealand. Approximately half of its sales come from outside the United States.

While it is technically a REIT, the company's largest segment is 'Performance Fibers', which has accounted for 64% of total sales year-to-date. Cellulose specialties represent the majority of profits within the PF segment. Cellulose specialties are used in the manufacture of flat panel TVs, computer screens, impact-resistant plastics (acetate), filters, tires, and many other consumer products.

Rayonier also reports its results in the following 3 segments: Forest Resources (23% of total sales), Real Estate (4%) and Other Operations (8%).

Third Quarter Results

Rayonier reported its third quarter results on October 24. Earnings per share came in at 44 cents, missing the Zacks Consensus Estimate by 3 cents. It was a 29% decrease from the same quarter last year.

Total sales declined slightly to $384.8 million, well below the consensus of $414.0 million. This was due in large part to a 22% drop in the 'Performance Fibers' segment as 'Cellulose Specialities' sales fell 19% year-over-year. Sales were higher in each of the other three segments, however.

Meanwhile, operating income fell 25% year-over-year as the operating margin declined 707 basis points to 21.7% of total sales. This too can be attributed to weakness within the 'Performance Fibers' segment, which saw operating income drop 38% from the same quarter last year.

Estimates Falling

Falling the Q3 miss, analysts revised their estimates significantly lower for both 2014 and 2015. Analysts continued to lower their estimates after the company warned on December 16 that its expects 2014 prices for cellulose specialties to decline 7-8%.

It is a Zacks Rank #5 (Strong Sell) stock.

The 2014 Zacks Consensus Estimate is now $2.02, down from $2.76 just 90 days ago.

You can see the sharp decline in both 2014 and 2015 estimates in the company's 'Price & Consensus' chart:

Rayonier is scheduled to report its Q4 results on Monday, January 27.

Premium Valuation

Shares of Rayonier have plunged 28% since the Q3 earnings report. But it still doesn't look like a value here. The stock trades at 21x 12-month forward earnings, well above the 16x forward multiple for the S&P 500. And its price to sales ratio of 3.4 is still well above its 10-year historical median of 2.8.

The Bottom Line

Considering the major headwinds in its largest business segment and its premium valuation, investors should wait for earnings momentum to improve before buying Rayonier.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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