A Rare Economic Moat in the Basic Materials Sector
High customer switching costs give specialized cellulose producer Rayonier a competitive advantage, and the shares look cheap, too.
A Rare Economic Moat in the Basic Materials Sector
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Daniel Rohr: Economic moats can be hard to come by in the commodity world of basic materials. Rayonier Advanced Materials, a recent spin-off of timber REIT Rayonier, is an exception. Shares of this narrow-moat producer of highly refined cellulose specialties are trading at a significant discount to our $49 fair value estimate, and we [have given the shares a 5-star rating].
The attractiveness of Rayonier’s business model comes down to switching costs. The majority of its highly refined cellulose specialties end up in cigarette filters. Switching costs manifest because customers--cigarette smokers--can taste the difference from one producer’s acetate tow filter to that of another.
Consequently, cigarette manufacturers, who are loath to change the flavor profile of their cigarettes, tend not to switch from one producer to another. This typically results in rather robust, inconsistent pricing, which we think will serve Rayonier and its shareholders well over the long term.