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Domtar (UFS) Up 2.8% Since Earnings Report: Can It Continue?

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About a month has gone by since the last earnings report for Domtar Corporation (UFS - Free Report) . Shares have added about 2.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Domtar Beats Q2 Earnings Despite Lower Sales

Domtar reported second-quarter 2017 adjusted earnings of $38 million or $0.61 per share, flat year over year. Earnings beat the Zacks Consensus Estimate of $0.53. Strong productivity that resulted in solid cost performance helped the company to post better-than-expected earnings.   

Sales in the reported quarter came in at $1,224 million compared with $1,267 million in the year-ago quarter. Revenues, however, missed the Zacks Consensus Estimate of $1,337 million.

Operating income for the reported quarter was $64 million compared with $42 million in the first quarter of 2016. The increase in operating income was driven by a rise in average selling prices for pulp, lower raw material costs, favorable productivity and lower maintenance costs.

Segment Performance

Pulp and Paper: Sales from this segment were $999 million versus $1,054 million in the year-ago period. Operating income came in at $65 million versus $35 million in the year-ago quarter. Paper inventories recorded an increase of 18,000 tons and pulp inventories increased by 33,000 metric tons from the previous quarter.

Personal Care: Sales were $241 million versus $228 million in the year-earlier quarter, while operating income was $13 million versus $15 million in the year-ago quarter.

Domtar is streamlining its cost structure, improving revenue quality and seeking growth through profitable investment opportunities with a commitment to environment and sustainable practices.

Balance Sheet

Cash and cash equivalents totaled $124 million as of Jun 30, 2017. Long-term debt was $1,203 million at quarter end. Cash flow from operating activities totaled $121 million and capital expenditures were $37 million. Domtar’s net debt-to-total capitalization ratio was 28% as of Jun 30, 2017.

The company did not repurchase any share during the quarter. At the end of the quarter, the company had 62.7 million shares outstanding.

A steady dividend payment policy is part of Domtar’s long-term strategy of providing attractive risk-adjusted returns to its stockholders. In addition, the company has historically repurchased shares as part of its balanced approach to deploy capital. The company’s investment strategy takes a holistic view of the rapidly evolving market and deploys a dynamic capital allocation approach to execute its growth strategy.  

Moving Forward

The company expects to invest in innovation, marketing and targeted growth initiatives to capture the opportunities in its segments. The company expects its paper shipments to be in line with the total demand in market. The company expects its pulp shipments to increase due to the ramp-up of the Ashdown fluff pulp line. Investments in advertising and promotion in addition to new customer wins, is expected to boost sales in personal care.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

Domtar Corporation Price and Consensus

 

Domtar Corporation Price and Consensus | Domtar Corporation Quote

VGM Scores

At this time, Domtar's stock has a nice Growth Score of B, however its Momentum is doing a bit better with an A. Following the exact same course, the stock was allocated also a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and momentum investors than growth investors .

Outlook

The stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.




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