Archive for the ‘RYAM’ category

Rayonier Advanced Materials (RYAM) – The Miss That Should Surprise No One

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Rayonier Advanced Materials (RYAM) is a fantastic business. I first wrote it up here just prior to its spinoff from RYN. But I also laid out the case that 2014 was going to turn into a disappointment for RYAM. To quote myself:

I think RYAM will miss on production volumes in 2014 and end the year at 500k tons of specialty and 125k tons of commodity cellulose.

I believe that investors expecting 2014 to be on par with management’s guidance are going to be disappointed.

Turns out I wasn’t far off. On this morning’s call, Management confirmed that full year volumes should come in near my estimates (625k tons total; 25% of that would be commodity, 75% specialty) and EBITDA should be closer to $265MM (from their initial guidance just north of $300MM).

This was a miss. But it was a miss that should’ve surprised no one.

But the market is full of crazy people and it’s fully of lazy people, and the stock sold off rather dramatically after the news hit (down over 10% today).

To those investors that are neither crazy nor lazy, this dislocation may turn into a fantastic buying opportunity. To quote myself once again:

But where others see disappointment, I see opportunity. To understand why, you have to look through the next 12 – 24 months. You see, RYAM has already executed their large capital program. They already spent $385MM to transition their remaining commodity cellulose capacity to specialty; those costs are sunk. And when the market soaks up the existing excess capacity, RYAM shareholders will be the biggest beneficiaries of future specialty cellulose inflation. RYAM’s position reminds me of a quote from Warren Buffett:

In an inflationary world, a toll bridge would be a great thing to own because you’ve laid out the capital costs. You built it in old dollars, and you don’t have to keep replacing it.

If RYAM gets into the mid-20s, you will have the rare opportunity of owning a truly great business at 5x core future EBITDA earnings power.

Even the crazy and lazy should find that compelling.

Rayonier Advanced Materials (RYAM) – Will an Unnatural Shareholder Base Create an Opportunity?

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Note: this write-up was sent out to my network on 26-Jun when RYAM was trading at $36 / share. It has since risen to $42. If you are an accredited investor / buysider and want to get on my VIP research list, email me at analyst @ this domain.

Rayonier (RYN) is known to most investors as a timber REIT. But to industrial and manufacturing companies, Rayonier is the leading supplier of specialty cellulose, a product used in a wide variety of end market applications (cigarette filters, cosmetics, pharmaceuticals, LCD display screens, and more). On 27-Jun, investors were introduced to this second business as Rayonier (RYN) completed its spin-off of Rayonier Advanced Materials (RYAM; here).

What makes this spin particularly interesting is that RYN is a REIT. The investor base interested in owning RYN is likely to be very different than the investor base interested in owning RYAM. So it’s possible we experience a situation where yield-hungry investors indiscriminately dump RYAM over the coming weeks. And indiscriminate selling creates opportunity.

What’s also interesting is that the CEO of RYN is now the CEO of RYAM. Now let’s think about this… Why would the most knowledgeable person in the Company choose to go with the Advanced Materials business? My guess in one word: opportunity.

High-level, here’s how the Advanced Materials business works:

RYAM buys wood chips (hardwood or softwood) and through a sophisticated process of pulping, cooking, bleaching and finishing, produces a very unwood-like product known as dissolving pulp (you can think of it as a natural plastic). Here’s an image pre- and post-processing:

Dissolving Pulp

This dissolving pulp is then marketed to customers as commodity cellulose and specialty cellulose, depending on the grade / characteristics. RYAM is the worldwide leader in the specialty cellulose business, with greater than 2x sales volume versus its competition. It ranks #1 in acetate (end product: cigarette filters, textiles, LCD film), is top 4 in ethers (end product: pharma, food products), and #1/#2 in high-strength viscose/specialty (end product: tire cords, casings, explosives).

There are a few key points to understand about this business: