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Value

The paper industry recovered from the recession lows in 2010 but where does it go from here? Domtar Corporation (UFS - Snapshot Report) has attractive valuations, with a forward P/E of 9.8, but analysts expect earnings growth to get tougher.

This Zacks Rank #1 (strong buy) is the largest integrated manufacturer and marketer of uncoated freesheet paper in North America and is #2 in the world. Based in Montreal, it operates 9 pulp and paper mills in the United States and 4 in Canada.

It also operates a Paper Merchants segment which designs and manufactures business, commercial printing and publishing papers.

Best Fourth Quarter Profit Ever

On Feb 4, Domtar reported its fourth quarter preliminary results and saw sales fall to $1.42 billion from $1.46 billion in the year ago quarter.

Paper sales, however, rose 2% to $1.21 billion from $1.19 billion. Paper shipments were weaker in the quarter, mainly due to seasonal factors, but average pricing held up well.

Earnings per share actually missed the Zacks Consensus for the first time in 4 quarters. Earnings were $2.41 versus the consensus of $2.98.

Watch Out for Rising Commodity Costs

While the company continues to execute its "Perform, Grow, Breakout" strategy, it also expects declining long-term paper demand in North America. This is expected to be partially offset by a gradual return to pre-recession employment levels in the US.

However, the company warned that rising commodity pricing could pressure its input costs throughout 2011.

It expects to manage the business conservatively while the global recovery continues.

Shutting Down an Arkansas Paper Machine

On Mar 29, the company announced it would permanently shut down 1 of 4 paper machines at its Arkansas pulp and paper mill. It will have to layoff about 110 employees.

"Domtar is committed to keeping a balance between its supply and its customer demand," said John D. Williams, President and CEO.

"Because secular demand decline in North America continues, we must permanently reduce our uncoated freesheet paper production capacity," he added.

The company will take a total pre-tax charge of about $80 million, with $6 million to be recognized in the first quarter and $74 million in the second.

Zacks Consensus Estimates Rise

Despite the announcement of the plant shutdown, analysts have been raising full year estimates. In just the last week, 2 estimates have moved higher for both 2011 and 2012.

The 2011 Zacks Consensus Estimate jumped to $9.07 from $8.62 in the prior month.

Analysts do see further weakness in 2012, even while raising estimates. The 2012 Zacks Consensus rose to $8.40 from $8.18 per share.

Still a Value Stock

Shares have been on a tear over the last 2 years and are now at 3-year highs.

But even with the share surge, the valuations are still pretty attractive.

In addition to the low P/E, the company has a price-to-book ratio of 1.2, which is under the 3.0 level considered "value."

It also has a price-to-sales ratio of only 0.6. A P/S ratio under 1.0 usually indicates a company is undervalued.

Shareholders also get rewarded with a dividend which is currently yielding 1.2%.

Domtar is expected to report first quarter results on Apr 28.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.

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