Rayonier (NYSE:RYN) is investing several hundred million dollars through 2013 to expand manufacturing capacity in the company's Cellulose Specialties product line. This extra capacity will come at the expense of the Absorbent Materials business, which the company plans to exit.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Performance Fibers
The Performance Fibers business is the company's largest business segment, and generated sales of $255.5 million in the quarter ending September 30. This represented 66% of the company's total sales for the quarter.

Rayonier owns and operates two facilities in the Performance Fibers business. The company's largest mill is in Jesup, Georgia, and has a capacity of 580,000 metric tons. The second mill is in Fernandina Beach, Florida, and has capacity of 160,000 metric tons.

The Performance Fibers segment comprises two product lines. In the Cellulose Specialties business, Rayonier produces higher end fibers that are used as raw materials in many different products, including cigarette filters, pharmaceuticals, cosmetics, tires, packaging and plastics.

The Absorbent Materials business makes fluff fibers used as absorbent materials in diapers, feminine hygiene products, industrial towels and other products. This product line is considered a lower end type of business. (For related reading on manufacturing, see Vital Link: Manufacturing And Economic Recovery.)

Rayonier is planning to invest $300 million from 2011 to 2013 to convert the company's existing Absorbent Materials capacity to produce Cellulose Specialties. This expansion will add an extra 190,000 metric tons of annual capacity in this product line, and eliminate all of Rayonier's Absorbent Materials capacity.

Rayonier prefers the market dynamics in the Cellulose Specialties business, and expects steady growth here over the next five years. The company estimates that worldwide demand will increase from the 2010 level of 1.4 million metric tons to 1.73 million tons by 2016.

Rayonier has good pricing power in this product line and has seen five straight years of increased pricing. The company is currently negotiating contracts with customers for 2012 and expects to release more details during the fourth quarter earnings conference call.

One company that competes with Rayonier in the Cellulose Specialties market is Buckeye Technologies (NYSE:BKI). The company is the second largest producer with volume of 180,000 tons in 2010.

Customer Concentration
One risk for Rayonier in the Performance Fibers business is the company's dependence on several large customers for a significant portion of revenue. In 2010, Eastman Chemical Company (NYSE:EMN) and Celanese (NYSE:CE) generated 20 and 15% of the Rayonier's sales in this business segment, respectively.

The Bottom Line
Rayonier is adding capacity to manufacture products that generate a higher return than other product lines, a logical strategy that makes sense. One can only hope that the market for these types of fibers is still favorable in 2013, when the extra capacity comes on line. (For related reading, see Cyclical Versus Non-Cyclical Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  5. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  6. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  7. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
Trading Center