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Domtar (UFS) Stock Up 53% in 3 Months: More Room to Run?

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Domtar Corporation’s (UFS - Free Report) shares are rallying higher after the company announced that it has entered into a strategic business combination with Canada-based Paper Excellence. The stock has gained 52.6% over the past three months, outperforming the industry’s growth of 16.4%. Sale of the Personal Care segment, escalating demand for softwood and fluff pulp, as well as improving demand trend in the paper business have also contributed to this price appreciation.


Let’s delve deeper and analyze the factors driving the stock.

Q1 Earnings Improve Y/Y

Domtar recently reported first-quarter 2021 results. The company delivered adjusted earnings of 9 cents per share against an adjusted loss per share of 27 cents in the prior-year quarter.

The company has a trailing four-quarter average earnings surprise of 73.4%.

Driving Factors

Domtar recently inked a deal with Paper Excellence, per which the latter will acquire all of the issued and outstanding shares of Domtar common stock for $55.50 per share, in cash. This represents Domtar’s enterprise value of $3 billion. The transaction is expected to close in the second half of the current year. Paper Excellence intends to continue the operations of Domtar as a stand-alone business entity. Domtar will continue being led by its management team, and Paper Excellence plans to retain its corporate and production locations. This buyout marks Paper Excellence’s foray into the American market and will help the company bank on Domtar’s expansive global footprint.

In March, Domtar completed sale of its Personal Care division to American Industrial Partners for $920 million. The divestiture supports Domtar’s primary focus on building an industry-leading Paper, Pulp and Packaging business.

The company’s pulp business will gain from steady demand for softwood and fluff pulp, and supply constraints. Recently, Domtar announced its plan to expand the Georgia-based Engineered Absorbent Materials (EAM) facility. This move will aid the company to grow its leading global absorbent materials and technology business offering fluff pulp and airlaid nonwoven materials.

As people gradually start returning to schools and offices, paper demand will likely see a recovery this year. However, the ever-intensifying nature of the pandemic still remains a concern. Domtar’s pulp and paper segments are poised to gain from price-rise actions in 2021. Moreover, its cost-control actions are likely to deliver annual run-rate cost savings of $200 million by the end of 2021.

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.

Zacks Rank & Stocks to Consider

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

Better-ranked stocks in the basic materials space include ArcelorMittal (MT - Free Report) , Celanese Corp. (CE - Free Report) and Dow Inc. (DOW - Free Report) . All of these stocks flaunt a Zacks Rank #1 (Strong Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcelorMittal has a projected earnings growth rate of 984.7% for the current fiscal year. The company’s shares have soared nearly 179% in the past year.

Celanese has an expected earnings growth rate of 68.3% for the current fiscal year. The company’s shares have rallied around 90% over the past year.

Dow has an estimated earnings growth rate of 261.6% for the current fiscal year. The company’s shares have gained roughly 75% in a year’s time.

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Domtar Corporation (UFS) - free report >>