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Here's Why You Should Add Domtar (UFS) to Your Portfolio Now

Zacks Equity Research
·5-min read

Domtar Corporation UFS looks promising at the moment on the back of high demand for softwood and fluff pulp triggered by strong requirement in tissue and towel. Improving sales in the paper business over the past few months bode well. The sale of the Personal Care segment will help build an industry-leading paper, pulp and packaging company and also strengthen its financial position and enhance liquidity. Domtar’s focus on repurposing and converting assets will contribute to earnings in the days ahead.

Domtar currently has a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities for investors.

Let's delve deeper into the factors that make Domtar stock a compelling investment option at the moment.

Strong Q4 Results

Domtar delivered fourth-quarter 2020 adjusted earnings of 34 cents per share as against the adjusted loss of 16 cents reported in the prior-year quarter.

Positive Earnings Surprise History

Domtar outpaced the Zacks Consensus Estimate in three of the trailing four quarters, while missed on one occasion. It has a trailing four-quarter earnings earnings surprise of 127.6%, on average.

Price Performance

The stock has gained around 17.3% over the past three months, outperforming the industry’s growth of 16.6%.

Rising Estimates

Earnings estimate revisions have the greatest impact on stock prices. The Zacks Consensus Estimate for Domtar’s 2021 earnings has moved up around 23% over the past 60 days, reflecting analysts’ confidence in the stock. The estimate for the ongoing quarter has moved north by a whopping 589%.

Inexpensive Valuation

Domtar’s forward 12-month EV/EBITDA ratio is 6.8, while the industry's average trailing 12-month EV/EBITDA is 10.6. Consequently, the stock is cheaper at this point based on this ratio.

Growth Drivers in Place

Domtar recently completed the sale of its Personal Care division to American Industrial Partners for $920 million. The divesture is in sync with the company’s primary focus on building an industry-leading Paper, Pulp and Packaging business. This move will also aid the company to strengthen its financial position, boost liquidity and share repurchases.

In the pulp business, demand for softwood and fluff pulp will remain robust in the near term on robust demand in tissue and towel. Higher requirement, maintenance outages and restocking in China will drive the business in the near term. In the paper business, the company has been witnessing improved sales over the past few months, after recovering from the pandemic-induced slump. The business is anticipated to gain on expected benefits from cost reductions, strong operational performance at its mills and improving demand. Domtar is implementing cost-control actions and is on track to deliver annual run-rate cost savings of $200 million by the end of 2021.

The company remains focused on repurposing its assets to generate earnings and enhance shareholders’ value. As part of its asset conversion roadmap, the company has identified up to four large scale paper machine/mill repurposing projects that have the ability to produce 2.5 million tons of containerboard. The containerboard market is North America’s largest pulp and paper market, and is currently a 40-million-ton market with an annual growth rate of 2% (approximately 800,000 tons).

Given the growth prospects, Domtar plans to foray in the containerboard market with the conversion of its Kingsport, TN paper mill. Once fully operational, the mill will become the second largest recycled containerboard machine in North America with an annual production capacity of around 600,000 tons of high-quality recycled linerboard and corrugated medium. It has the potential to become one of the lowest-cost recycled containerboard mills in the United States. The conversion is expected to be completed by the end of 2022.

Domtar plans to complete the conversion of the Ashdown, AR mill to 100% softwood and fluff pulp over the next nine to 12 months. Following the conversion, Ashdown will be a world-class market pulp mill with an annual production capacity of 775,000 tons of fluff and softwood pulp.

Other Stocks to Consider

Some other top-ranked stocks in the basic materials space include Impala Platinum Holdings Limited IMPUY, Fortescue Metals Group Limited FSUGY and BHP Group BHP. All of these stocks sport a Zacks Rank #1, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Impala Platinum has an expected earnings growth rate of 195.9% for the current fiscal year. The company’s shares have surged 58% in the past three months.

Fortescue has a projected earnings growth rate of 84.3% for the current fiscal year. The company’s shares have increased 15% in the past three months.

BHP Group has a projected earnings growth rate of 65.6% for the current fiscal year. The company’s shares have appreciated 28.5% in the past three months.

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