|Scooped by Jack D Bridges|
The Retail Forest: 2016 Edition
Where is the best place to invest among publicly traded timberland owners?
A better question: Where are the mispriced assets?
In 2009, the answer to that question was simple: Everywhere. Equity investors placed depressed valuations on timber businesses regardless of balance sheet, geography, HBU value, or stocking. For those with cash to deploy, this total misread of the asset class was a gift. A blessing.
Heading into 2016, few would describe the investing climate as a blessing. Rates are going up. The strong dollar isn't helping US exports (years of QE didn't hinder goods leaving our shores). And, the Chinese "miracle" of 10% growth has slowed considerably, helping send commodity prices crumbling--and tanking economies from Asia to S. America along with them.
And while some of the above has reduced harvest levels in export-ready markets, thankfully, these headwinds have not dented the US housing market a whole lot (yet).
Focus on Rayonier
But, getting back to business: Where is the value in the forest right now? Is it Plumhaeuser, and the strength of scale, capital, and synergy (and perhaps, spinning off pieces to Wall Street eventually)? Or, does the prospect of continued industry consolidation make Potlatch & Rayonier more attractive?
Strictly based on value, (the gap between private market value of the complete portfolio and the current market cap), Rayonier at $22 is worth buying. Dave Nunes, the CEO, seems to agree. He bought 10K shares at $22 last week (insider buying, unlike insider selling, sends an unambiguous signal).
This, however, is not a consensus view. Portfolio managers have dumped RYN shares throughout the year because of reduced inventory "issues" (talked about by the estimable Sam Radcliffe at the time), scaled back harvest levels in the PNW, and a reduced dividend. This selling pressure is not abating as we head into 2016. Why?
Interestingly, notice Rayonier's 4th largest shareholder: Third Avenue. On the surface, the carnage in high-yield credit markets has nothing to do with the price of a timber company from day-to-day...
But, if Third Avenue loses investor confidence (done), and has to liquidate other funds to soothe the angry hoards gated in their blown-up credit fund, some--or all-- of those 5.5M shares of RYN just might need a new home.
Keep in mind that Third Avenue alone could keep the price of Rayonier depressed for a while--and smart investors will take advantage of this forced selling, putting in low-ball bids, and remembering the long-term picture for Rayonier is very bright.
It's worthwhile skimming this recent Rayonier Investor presentation...before looking at the ugly chart below.
The following chart illustrates how badly RYN equity has underperformed. Ouch. But, if one is ok being early (and didn't buy above $30), this is a chart that value investors buy:
Beyond Rayonier at $22 / share, it's hard to handicap the rest of the timber REIT field at present. And yet, we do know this: The screaming bargains of years past are no more--and as rates begin to rise, yield hungry investors hiding in the forest might retreat back to the "safety" of treasuries once again.
No, it's best to remain patient with so much in transition. The fickle nature of Wall Street may get a lot about timber businesses & investing wrong...but it's the friend of those who do their homework, make considered decisions, and always take a longer view.