Friday, December 14, 2001

Hard-Asset Plays

NEW YORK - On a 12-month basis, the consumer price index has yet to flip over to the deflationary side, but prices are falling throughout the economy. This bodes poorly for hard-asset companies, whose business lies in timber, gold and other resources susceptible to price declines.

So why should investors give natural-resource companies a second look this time? It's hard to believe now, but the recession won't last forever. An economic stimulus package is working its way through Congress, the Federal Reserve has pumped liquidity into the economy via 11 cuts in short-term interest rates, and corporate overhead has been dramatically reduced. A few months from now, the bad times could be a faint memory. If so, the fortunes of companies in the business of hard assets are likely to improve.

Of those companies, timber concerns look like worthwhile long-term investments, according to Todd Perkins, analyst with Denver-based Berger Funds. One such example is Jacksonville, Fla.-headquartered Rayonier (nyse: RYN - news - people ), which is held by the Berger Small Cap Value Fund ($1.3 billion in assets).

For hard-asset companies, Perkins likes a reasonably healthy balance sheet, with debt preferably no more than 50% of total capitalization. He also prefers companies with positive free cash flow, which is cash from operations minus capital expenditures and dividends paid. Cash flow from operations refers to net cash provided by core business activities.

Rayonier, with $8.52 in free cash flow per share over the past 12 months, fits this profile. The stock, trading 4% off its 52-week high, sells for six times free cash flow and 22 times estimated 2002 earnings per share. Rayonier yields 3%.

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