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Why Is Domtar (UFS) Down 7.3% Since Last Earnings Report?

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It has been about a month since the last earnings report for Domtar (UFS - Free Report) . Shares have lost about 7.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Domtar due for a breakout? 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's Q3 Earnings Beat, Revenues Miss Estimates

Domtar delivered third-quarter 2018 adjusted earnings of $1.46 per share surpassing the Zacks Consensus Estimate of $1.14 by a margin of 28%. Earnings also improved 42% on a year-over-year basis.

Including one-time items, Domtar reported earnings per share of $1.57 cents in the quarter compared with $1.11 reported in the year-ago quarter.

Consolidated sales inched up 1% year over year $1,367 million but fell short of the Zacks Consensus Estimate of $1,433 million.

Consolidated adjusted operating income came in at $114 million, up 93% from the year-ago quarter’s figure of $59 million. Higher average selling prices for pulp and paper, and favorable productivity led to year-over-year improvement. However, the benefits from lower raw material costs, maintenance costs and selling, general and administrative expenses were offset by higher freight costs. Lower volumes were also a deterrent.

Segmental Break-Up

Quarterly revenues of the Pulp and Paper segment came in at $1,146 million, up 9% year over year. The segment reported operating profit of $135 million compared with $89 million in the prior-year quarter.

Sales from the Personal Care segment declined 6% year over year to $237 million. The segment reported an operating loss of $3 million compared with $8 million in the prior-year quarter.

Balance Sheet & Cash Flow

At the end of the quarter under review, the company had cash and cash equivalents of $256 million, up from $139 million at the end of 2017. Long-term debt was $1,103 million as of Sep 30, 2018, compared with $1,129 million as of Dec 31, 2017. Domtar generated $337 million of cash from operating activities during the nine-month period ended Sep 30, 2018, compared with $324 million reported in the comparable period last year.

Moving Forward

For the fourth quarter of 2018, the company expects lower maintenance costs and recently announced price increases to aid the Pulp and Paper segment’s results. Despite commodity cost inflation, the Personal Care segment will benefit from higher volume and its margin-improvement efforts.

Escalating raw material costs are affecting margins in adult incontinence and baby diapers. Consequently, Domtar is accelerating the pace of actions to improve margins and EBITDA, by reducing its cost base. This plan includes headcount reductions, permanent closure of the Waco, TX facility, and commercial and operational initiatives. The company expects to realize annual benefit of approximately $25-$30 million from the plan.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 55.39% due to these changes.

VGM Scores

At this time, Domtar has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

Domtar has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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