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Domtar (UFS) Rides on Margin-Improvement Plan & Strong Demand

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On Mar 7, we issued an updated research report on Domtar Corporation (UFS - Free Report) . The company’s performance will be driven by healthy demand in the paper and pulp markets, cost savings, margin-improvement plan and price increases. Its balanced capital-deployment approach remains another tailwind.

Domtar reported fourth-quarter 2018 adjusted earnings per share of $1.63, marking a significant improvement from fourth-quarter 2017 earnings per share of 64 cents. Strong performance of the Pulp and Paper segment backed by solid business fundamentals, accelerating price realizations and improved productivity led to the impressive results despite higher raw material costs. Consolidated sales went up 4% year over year $1,390 million.

Notably, the Zacks Consensus Estimate for 2019 earnings is currently pegged at $5.61, reflecting expected year-over-year growth of 21.7%. The same for first-quarter 2019 is pegged at $1.48, reflecting expected year-over-year growth of 67.8%. The stock also has expected long-term earnings per share (EPS) growth rate of 5%.

Growth Drivers in Place

Domtar announced a margin-improvement plan within the Personal Care Division. As part of this plan, the company’s board of directors approved the permanent closure of its Waco, TX Personal Care manufacturing and distribution facility, the relocation of certain of Domtar’s manufacturing assets, and a workforce reduction of approximately 214 employees across the division.

The Waco facility is expected to cease operations in third-quarter 2019. The Personal care division is anticipated to benefit from the margin-improvement plan and new customer wins in 2019.

Domtar expects to witness positive market conditions for its Paper business. In 2019, the company expects higher paper shipments in response to increased demand. The company anticipates positive momentum in the paper and pulp markets aided by healthy demand. In the Pulp business, Domtar performed well in recent years, driven by price increases and a solid operational performance. In the Dec-end quarter, average pulp prices increased sequentially to $8 per metric ton.

In addition, the company announced and continues to implement price increases across several softwood and fluff pulp grades. The company also predicts that the softwood and fluff pulp markets will remain relatively stable through 2019, supported by demand growth.

Domtar is well placed to gain from its focus on cost savings, reduced overhead spending and customer portfolio-transition efforts. Domtar will continue to pursue a balanced approach to the deployment of capital while maintaining the flexibility to carry out its growth strategy.
 
Share Price Performance

Shares of Domtar have gained 7.5% over the past year, while the industry has recorded a loss of around 33.3%.



Zacks Rank and Other Stocks to Consider

Domtar currently carries a Zacks Rank #2 (Buy)

Some other top-ranked stocks in the Basic Materials sector are Ingevity Corporation (NGVT - Free Report) , Innospec Inc. (IOSP - Free Report) and Materion Corporation (MTRN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Ingevity has an expected earnings growth rate of 17.9% for 2019. The company’s shares have rallied 36.7%, over the past year.
 
Innospec has an expected earnings growth rate of 3.5% for the current year. The stock has appreciated 19.8% in a year’s time.
 
Materion has an expected earnings growth rate of 12.6% for 2019. The company’s shares have gained 7.6%, in the past year.

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