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Basch Report
Jax Daily Record Thursday, Feb. 13, 202005:20 AM EST

Rayonier watching for coronavirus impact

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The timber and real estate company says it remains confident in the “long-term potential of the China export market.”
by: Mark Basch Contributing Writer

Last year, Rayonier Inc. was closely watching trade negotiations to see how they might impact the company’s sales to China.

This year, the timber and real estate company has a new concern about China: the coronavirus.

“The coronavirus outbreak has significantly curtailed manufacturing and construction activity in the region,” said Chief Financial Officer Mark McHugh during Rayonier’s quarterly conference call last week, according to a transcript posted by the company.

In addition to its timber properties in the Southeast U.S., Rayonier operates timberlands in the Northwest and in New Zealand, which do business with China.

Rayonier last month announced a deal to expand its timber properties in the Northwest by acquiring Poulsbo, Washington-based Pope Resources.

“Overall, we remain confident in the long-term potential of the China export market, and we are cautiously optimistic that the U.S.-China Phase I trade deal will lead to a gradual improvement in market conditions,” McHugh said.

However, the impact of the coronavirus and competition from Europe is creating near-term challenges in timber markets, he said.

Meanwhile, Rayonier said profits from its Southeastern timber operations were strong in the fourth quarter.

That lifted fourth-quarter earnings to 12 cents a share, up from 2 cents in the fourth quarter of 2018. The earnings also beat the consensus forecast of analysts by 2 cents, according to Zacks Investment Research.

Rayonier said results from its real estate division were less than expected, due to the timing of sale closings.

However, McHugh said momentum is strong at the company’s Wildlight mixed-use development in Nassau County.

“Most of the major infrastructure is now in place and our next phase of 122 residential lots is scheduled to be substantially completed by the end of Q1,” he said.

Rayonier moved its headquarters from Jacksonville to Wildlight in 2017.

McHugh projected 2020 earnings, excluding the impact from the Pope acquisition, of 36 cents to 44 cents a share, down from 46 cents in 2019.

Rayonier’s stock fell by $2.34 last Thursday and Friday to $28.22 after the earnings report.

The decline prompted Raymond James analyst Collin Mings to reiterate his “outperform” rating on the stock Monday.

“Overall, we believe another earnings season pullback in Rayonier shares has once again translated into a favorable opportunity for investors,” Mings said in a research note.

“We witnessed Rayonier shares react unfavorably in response to earnings/guidance multiple times in 2019 and subsequently rebound as investors fully digested the results/outlook,” he said.

D.A. Davidson analyst Steven Chercover also maintained a “buy” rating.

“With the accretive Pope deal on the way, a solid housing backdrop, and a standalone Rayonier outlook pointing to a nice pickup from 2019, we think there remains attractive upside potential for shares,” Chercover said in his report. 

Fidelity stock drops on FGL deal

Fidelity National Financial Inc.’s stock began February at record high levels.

However, Wall Street cooled a bit on the Jacksonville-based title insurance company when it announced a $2.7 billion deal to buy annuity and life insurance company FGL Holdings.

Fidelity’s stock dropped by $3.06 to $45.98 Friday after the announcement.

“FNF believes that this deal, while non-core, would help provide a steadier, counter-cyclical income stream to the cyclical, transactional title business,” Stephens Inc. analyst John Campbell said in a research note.

“We believe that this deal will come with mixed receptions as some will like the accretion and diversification while some were likely looking elsewhere for the capital deployment and might take issue with FGL’s background,” he said.

The background is FGL is a holding company formed by Fidelity Chairman Bill Foley, who also is co-chairman of FGL.

The holding company which had no operations bought Des Moines, Iowa-based Fidelity & Guaranty Life (unrelated to Fidelity National Financial) in 2017.

Fidelity National Financial owns 7.9% of FGL’s stock and Foley controls 6.7%.

In a conference call with analysts Friday, Foley said Fidelity is buying FGL to diversify its business.

“It will perform well in economic environments that may be more challenging for title insurance,” he said.

FGL does well when interest rates are rising, he said, while the title insurance business drops off when rates rise and homebuying activity slows down.

“We’ve been very fortunate the last seven years with a low interest rate environment,” Foley said.

Fidelity said the deal will be accretive to its earnings per share, but analysts were uncertain about its impact on Fidelity’s stock.

“We believe FNF stock’s weakness on Friday was driven by uncertainty about how the market would ultimately value FNF now that roughly a quarter of its earnings will be coming from FGL, which was trading at roughly 7 times EPS vs. the 14.5 times for FNF pre-deal,” Keefe, Bruyette & Woods analyst Bose George said in a research note.

“While we remain positive on the business long-term, we believe the shares are appropriately valued since the title business appears to be trading at the higher end of its historical range,” said George, who maintained a “market perform” rating on the stock.

Analyst sees insurance costs hitting Landstar

Landstar System Inc. reported lower-than-expected fourth-quarter earnings because of higher insurance costs, and one analyst thinks that trend will continue.

Morgan Stanley analyst Ravi Shanker, who already was projecting a big drop in Landstar’s stock with an “underweight” rating, lowered his price target further last week.

“Insurance costs could be poised to be one of the most significant headwinds to the broader trucking universe in 2020 as the recent uptick in so-called ‘nuclear verdicts’ (high jury awards) have left insurance companies scrambling to re-price contracts in an attempt to offset elevated liability losses,” Shanker said in his report.

“While it should be noted that Landstar is far from alone in combating this dynamic, if the first quarter plays out as management expects, that will mark the third quarter in a row to miss the guidance range due to an adverse impact from insurance costs associated with a specific accident but more importantly, higher insurance costs could be an ongoing drag on margins.

During Landstar’s quarterly conference call, CEO Jim Gattoni said the company likely will incur costs from a fatal accident in January involving a driver contracted by Landstar. He did not give details on the incident.

Shanker lowered his target for Landstar’s stock from $85 to $80, well below its recent market price between $110 and $115.

“Though the commentary on market dynamics and the revenue guide (in Landstar’s quarterly report) were positives and we see management doing their best in difficult cyclical and secular circumstances, we see other names in the space as better ways to play the cycle recovery,” he said.

Analyst expects jump in FIS stock

Ahead of Fidelity National Information Services Inc.’s year-end earnings report Thursday, one analyst said he expects a big jump in its stock after the report.

“Given our view that FIS will report strong fourth-quarter results and guide in-line, we believe earnings will likely serve as a clearing event and potential catalyst for the stock,” Raymond James analyst John Davis said in a research note Monday.

Davis maintained a “strong buy” rating on the stock but increased his target price from $157 to $179.

“FIS remains our top idea as our new $179 target price implies 23% upside. As such, we recommend investors add to positions ahead of the print,” he said.

Apparently, some investors took his advice as the stock rose $3.52 to $149.98 Monday.

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