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Domtar Rises on News of IP Mill Closure

IP UFS XRX

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Shares of leading packaging and paper manufacturer Domtar Corporation (UFS - Snapshot Report) were up 16.5% at the close of trading on Sep 11, 2013 as news of rival International Paper Company’s (IP - Analyst Report) plans to shutdown the Courtland, Alabama paper mill manufacturing facility hit the market. Domtar’s stock was also buoyed by the regular quarterly dividend payment of 55 cents per share on the same date.

The Alabama mill produced papers for diverse applications like forms, envelopes, labels, copiers, printers and magazines. Increased digitalization has led the consumers to shift to online publications, electronic billing and filing. Thus, the demand for uncoated freesheet in North America fell drastically. The phased closure is likely to be completed by the end of first quarter 2014.

With the permanent shutdown of the facility, International Paper’s North American uncoated and coated freesheet paper production capacity will reduce by 950,000 tons, including 765,000 tons of uncoated freesheet. This is likely to shrink the North American capacity by 7%-8%, arguably the single largest in the industry’s history.

International Paper’s decision follows the footsteps of other players in the industry like Atlanta-based Georgia-Pacific LLC and Boise Inc. . Both these packaging and paper products manufacturers were forced to cut their productions due to decelerating demand owing to the meteorical rise of E-commerce and Internet.  

As market consolidation takes place and Darwin’s principle of ‘survival of the fittest’ takes the forefront, Domtar is likely to benefit the most. Earlier in July, Domtar closed the acquisition of Associated Hygienic Products, a wholly-owned subsidiary of disposable diaper industry pioneer Disposable Soft Goods International, to strengthen its Personal Care segment through lateral expansion.

Prior to that, in Jun 2013, Domtar completed the acquisition of Xerox Corporation’s ((XRX - Analyst Report)) paper and print media business in the U.S. and Canada to better serve its customers. Such continuous strategic investments and industry consolidation makes us bullish on Domtar.

Domtar manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. The company is the largest integrated marketer of uncoated freesheet paper in North America with established brands such as Cougar, Lynx Opaque Ultra, Husky Opaque Offset, First Choice and Domtar EarthChoice. Domtar also owns and operates an extensive network of strategically located paper and printing supplies distribution facilities.  

Domtar currently carries a Zacks Rank #3 (Hold).

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