US Market Focus Will Unlock Value Yet Risk Timber Pressures

Key Takeaways

• Exiting the New Zealand joint venture allows Rayonier to focus on U.S. growth and improves financial flexibility and margins.
  
• Repurchasing shares and issuing dividends from sale proceeds could increase EPS and return capital to shareholders.
  
• Rayonier faces revenue and margin pressures from a pending New Zealand business sale, demand declines, adverse geographic/product shifts, oversupply issues, and macroeconomic uncertainties.

Catalysts

Rayonier is a leading timberland real estate investment trust with assets located in some of the most productive softwood timber growing regions in the United States and New Zealand.

• Rayonier's strategy to exit the New Zealand joint venture allows it to focus capital on future growth opportunities within the U.S., which has favorable long-term growth prospects, thereby potentially improving revenue and net margins.
  
• The sale of the New Zealand business is expected to reduce leverage significantly, which may enhance earnings by lowering interest expenses and increasing financial flexibility for value-enhancing reinvestments.
  
• Rayonier plans to use a portion of the sale proceeds to repurchase shares and issue a special dividend, which can drive up EPS by reducing the share count and returning capital to shareholders.
  
• Favorable market conditions in the U.S., such as improved demand and pricing for timber in the Pacific Northwest and anticipated recovery in the Southern Timber segment, are expected to boost revenue and earnings in the second half of the year.
  
• Despite a challenging first quarter for real estate, Rayonier anticipates a very active second half of 2025 with a strong transaction pipeline, which is expected to bolster revenue and adjusted EBITDA for the segment.

Rayonier Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rayonier's revenue will decrease by 25.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.1% today to 18.8% in 3 years time.
• Analysts expect earnings to reach $97.1 million (and earnings per share of $0.63) by about May 2028, down from $358.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $109.8 million in earnings, and the most bearish expecting $76.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 68.3x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 4.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Rayonier Future Earnings Per Share Growth

Risks

• The pending sale of Rayonier's New Zealand business may lead to an initial reduction in revenue and earnings, as the business has historically contributed to the company's growth. (Revenue, Earnings)
  
• Rayonier's Southern Timber segment has experienced challenges due to declining demand, which contributed to a 39% decline in adjusted EBITDA. This trend, if continued, could affect long-term profitability. (Net Margins)
  
• The geographic shift to lower-priced regions and unfavorable product mix have led to significant declines in net stumpage realizations, impacting revenue generation. (Revenue)
  
• An oversupply of salvage timber from Hurricane Helene has created downward pressure on timber prices in key markets, posing a risk to future revenue and margins. (Revenue, Net Margins)
  
• The uncertain macroeconomic environment and tariff-related volatility, including potential higher duties on Canadian lumber, may impact Rayonier's ability to sustain current pricing and demand levels, potentially affecting earnings. (Earnings)

Valuation

• The analysts have a consensus price target of $30.0 for Rayonier based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $37.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $515.3 million, earnings will come to $97.1 million, and it would be trading on a PE ratio of 68.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $22.92, the analyst price target of $30.0 is 23.6% 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.