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Here's Why You Should Hold Domtar (UFS) in Your Portfolio Now

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Domtar Corporation (UFS - Free Report) 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 also bodes well. The company’s efforts to lower costs and maximize productivity will help negate the impact of higher input and maintenance costs. Further, its focus on repurposing and converting assets will contribute to earnings.

Domtar currently has a Zacks Rank #3 (Hold) 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 (Buy), or 3 offer the best investment opportunities for investors.

Let's delve deeper into the factors that make Domtar a stock worth retaining at the moment.

Upbeat Q1 Results

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

Positive Earnings Surprise History

Domtar has a trailing four-quarter earnings earnings surprise of 73.4%, on average.

Price Performance

The stock has soared around 175% over the past year, outperforming the industry’s rally of 101%.

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 27% over the past 60 days, reflecting analysts’ confidence in the stock. The estimate for the next year quarter has moved north by 11%.

Inexpensive Valuation

Domtar’s forward 12-month EV/EBITDA ratio is 9.6, while the industry's average trailing 12-month EV/EBITDA is 11.0. Consequently, the stock is cheaper at this point based on this ratio.

Growth Drivers in Place

In the pulp business, demand for softwood and fluff pulp will remain robust in the near term on strong requirement in tissue and towel. Fluff pulp is a key component in infant diapers and adult incontinence products. Near-term pulp markets are expected to remain steady on demand growth and limited supply. In the paper business, the company has been witnessing improved sales over the past few months. Demand is anticipated to pick up further as people return to schools and offices. Recently announced price increases in both pulp and paper will positively impact results.

Further, Domtar’s efforts to lower costs will benefit both the businesses. The company is on track to deliver annual run-rate cost savings of $200 million by the end of 2021. The cost-saving initiatives include capacity reduction and asset closures, mill-level cost savings and rightsizing support functions.

Domtar recently completed the sale of its Personal Care division to American Industrial Partners for $920 million. It is an important step in its ongoing portfolio transformation and toward its focus on building an industry-leading paper, pulp and packaging company.

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.

Stocks to Consider

Some better-ranked stocks in the basic materials space include Cabot Corporation (CBT - Free Report) , International Paper Company (IP - Free Report) and Nucor Corporation (NUE - Free Report) . 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.

Cabot has an expected earnings growth rate of 126% for the current fiscal year. The company’s shares have surged 83% in the past year.

International Paper has a projected earnings growth rate of 67% for the current fiscal year. The company’s shares have appreciated 95% in the past year.

Nucor has a projected earnings growth rate of 229% for the current fiscal year. The company’s shares have soared 159% in the past year.

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