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Morningstar | Chinese Trade Woes Lead to Lower Pacific Northwest Prices; Maintaining Rayonier's $27 FVE

After a number of robust quarters in the Pacific Northwest from a pricing perspective, weaker pricing softened Rayonier's results at the end of 2018. A combination of reduced U.S. homebuilding and tariffs on Chinese-bound logs led to lower demand. This drove lower stumpage prices in the region. However, performance in both the U.S. South and New Zealand was solid throughout the fourth quarter. While we've slightly lowered our 2019 outlook based on management's guidance and our expectations of weaker performance in the Pacific Northwest, our $27 per share fair value estimate is unchanged, as is our no-moat rating.

Over the course of 2018, management handled market conditions well. At the start of 2018, the company significantly pulled forward Pacific Northwest harvest volumes to take advantage of peak log prices, while tapering volumes nicely just as pricing fell off during the second half of the year. This strategy facilitated a nearly 24% increase in adjusted segment EBITDA in 2018, to $40.9 million. Segment results are likely to weaken in 2019, amid periods of weak pricing and higher unit costs. However, we think this will be somewhat offset by solid performance in New Zealand. New Zealand prices will rise if tariffs reduce Chinese log imports from the Pacific Northwest.

In the U.S. South, timber prices have continued to languish near all-time-lows on an inflation-adjusted basis. We expect results to improve slightly in 2019, largely due to increased guidance on harvest volumes. Despite our above-consensus housing forecast, it will take years to resolve timber oversupply in the U.S. South. After more than a decade of growth, the forests remain exceptionally well stocked. This will keep prices depressed, even as demand for lumber climbs over the coming five years.