Biomaterials Investments Will Elevate Demand While Tariffs Limit Gains

Key Takeaways

• Focus on biomaterials, specialty cellulose, and new global markets aims to drive long-term growth, higher margins, and offset trade challenges.
  
• Operational efficiencies, cost reductions, and regulatory trends in sustainable materials are set to boost profitability and create new market opportunities.
  
• Tariffs, operational setbacks, market oversupply, high costs, and regulatory hurdles collectively threaten reliability, margins, and future growth prospects across key business segments.

Catalysts

Manufactures and sells cellulose specialty products in the United States, China, Europe, Japan, rest of Asia, Canada, Latin America, and internationally.

• Ongoing investments and project decisions in the biomaterials segment, including U.S.-centric bioethanol and lignin products, position the company to capitalize on rising demand for renewable, bio-based materials-supporting long-term revenue growth and improved EBITDA margins as the market for sustainable alternatives expands.
  
• Execution of market diversification in response to China tariffs is redirecting cellulose commodity sales to untapped regions like India, Africa, and the Middle East, which should offset near-term trade headwinds and stabilize revenues as global demand for cellulose-based products increases in non-Chinese markets.
  
• Strategic shift toward high-margin, specialized cellulose specialties with a value-over-volume approach, along with mid-single-digit price increases, is expected to expand gross and EBITDA margins as end-users in pharmaceutical and personal care industries drive demand for high-purity derivatives.
  
• Cost-reduction initiatives and operational efficiency projects (including modernized facilities and process automation), along with normalization of input costs and recently completed maintenance outages, are projected to lower COGS/SG&A and help recover net margin lost from one-off Q1 disruptions.
  
• Secular macro trends such as increasing global regulatory push for single-use plastic bans and broader adoption of cellulose-based alternatives are likely to create new market opportunities and incremental volume growth, underpinning the company's long-term revenue and earnings outlook.

Rayonier Advanced Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rayonier Advanced Materials's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts are not forecasting that Rayonier Advanced Materials will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Rayonier Advanced Materials's profit margin will increase from -4.6% to the average US Chemicals industry of 8.4% in 3 years.
• If Rayonier Advanced Materials's profit margin were to converge on the industry average, you could expect earnings to reach $132.1 million (and earnings per share of $1.91) by about July 2028, up from $-72.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.7x on those 2028 earnings, up from -3.8x today. This future PE is lower than the current PE for the US Chemicals industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Rayonier Advanced Materials Future Earnings Per Share Growth

Risks

• Exposure to significant and potentially prolonged Chinese tariffs on U.S.-sourced cellulose commodities (~$85 million annual revenue impact) introduces material uncertainty to sales volumes and pricing; the ongoing need to rapidly diversify markets may not fully offset lost business, posing long-term risks to revenue and net margins.
  
• Operational disruptions from equipment failures, weather-related outages, and aging assets (extended periods between maintenance and weather-induced downtime) have led to production setbacks and increased input costs, creating uncertainty around reliable output and putting downward pressure on both margins and earnings.
  
• The company faces persistent adverse market dynamics in segments like high-yield pulp and paperboard, including oversupply (especially in China and India), declining prices, and increased competition (e.g., new Sappi capacity)-threatening sustainable long-term revenues and profit margins.
  
• Elevated corporate costs from higher environmental reserve requirements, unfavorable foreign exchange movements, and increased interest expenses (due to recent debt refinancing and a still-high net secured leverage ratio at 2.9x EBITDA) constrain cash flow and limit room for reinvestment or debt reduction, pressuring overall earnings and capital structure.
  
• Success of biomaterials and bioethanol growth initiatives is contingent on resolving feedstock and permitting challenges (e.g., operational and raw material constraints at the Tartas facility, and ongoing legal uncertainties for the Fernandina plant), exposing long-term growth projections and EBITDA expectations to execution and regulatory risks that could inhibit future revenue streams.

Valuation

• The analysts have a consensus price target of $6.5 for Rayonier Advanced Materials based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $132.1 million, and it would be trading on a PE ratio of 4.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $4.14, the analyst price target of $6.5 is 36.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.