Domtar Corporation (UFS - Free Report) looks promising at the moment on the back of healthy demand in the paper and pulp markets, cost savings, margin-improvement plan and price increases. The company’s shares have gained around 42.1% year to date.
Domtar currently has a Zacks Rank #2 (Buy) 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, offer the best investment opportunities for investors.
The trend in earnings estimate revisions also indicates a solid earnings outlook for Domtar.
Let's delve deeper into the factors that make Domtar stock a compelling investment option at the moment.
Strong Q4 Results
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.
Positive Earnings Surprise History
Domtar outpaced the Zacks Consensus Estimate in two of the trailing four quarters, average positive earnings surprise being 8.66%.
The stock has gained around 7.1% over the past year, outperforming the industry’s loss of 33.5%.
Earnings estimate revisions have the greatest impact on stock prices. The Zacks Consensus Estimate for Domtar’s 2019 earnings has moved up around 12.4% over the past two months, reflecting analysts’ confidence in the stock.
Strong Earnings Growth Prospect
The Zacks Consensus Estimate for 2019 earnings is currently pegged at $5.71, reflecting expected year-over-year growth of 23.8%. The same for first-quarter 2019 is pegged at $1.48, reflecting projected year-over-year improvement of 68.1%. Also, the stock has estimated long-term earnings per share (EPS) growth rate of 5%.
Domtar’s trailing 12-month EV/EBITDA ratio is 5.5, while the industry's average trailing 12-month EV/EBITDA is 7.6. Consequently, the stock is cheaper at this point based on this ratio.
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 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 investing in its growth strategy.
Domtar Corporation Price and Consensus
Other Stocks to Consider
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. 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 39.2%, over the past year.
Innospec has an expected earnings growth rate of 3.5% for the current year. The stock has appreciated 17.4% in a year’s time.
Materion has an expected earnings growth rate of 12.6% for 2019. The company’s shares have gained 6.5%, in the past year.
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