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Reasons to Hold Domtar (UFS) Stock in Your Portfolio for Now

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Domtar Corporation (UFS - Free Report) looks promising at the moment on the back of healthy demand in the paper and pulp markets, focus on cost savings, margin-improvement plan and price increases.

Domtar has a Zacks Rank #3 (Hold) and a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum. The company's score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 make solid investment choices.

Below, we briefly discuss the company's potential growth drivers and possible challenges.

Strong Q1 Results

Domtar delivered first-quarter 2019 adjusted earnings of $1.44 per share beating the Zacks Consensus Estimate of $1.34 by a margin of 7%. The bottom line also marked a significant improvement from the prior-year quarter’s earnings of 87 cents. Price and volume momentum in paper drove the results.

Positive Earnings Surprise History

Domtar outpaced the Zacks Consensus Estimate in two of the trailing four quarters, with an average positive earnings surprise of 4.10%.

Ahead of the Industry

The stock has gained around 19.9% year-to-date, outperforming the industry’s growth of 15.1%.

Strong Earnings Growth Prospect

The Zacks Consensus Estimate for 2019 earnings is currently pegged at $5.36, indicating an improvement of 16.3% from 2018.. The same for second-quarter 2019 is pegged at 99 cents, suggesting growth of 52.3% from the year-ago reported figure.

Cheap Valuation
 
Domtar’s trailing 12-month EV/EBITDA ratio is 4.8, while the industry's average trailing 12-month EV/EBITDA is 6.6. Consequently, the stock is cheaper at this point based on this ratio.

Return on Assets

Domtar currently has a Return on Assets (ROA) of 6.5% while the industry recorded ROA of 4.5%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

Growth Drivers in Place

Domtar announced a margin-improvement plan within the Personal Care Division which includes closure of its Waco, TX Personal Care manufacturing and distribution facility, the relocation of certain its manufacturing assets, and workforce reduction. The division is anticipated to benefit from the margin-improvement plan and new customer wins in 2019.

The company expects to witness positive market conditions for its Paper business. In 2019, the company anticipates higher paper shipments in response to increased demand. In the Pulp business, Domtar performed well in recent years, driven by price increases and a solid operational performance. The company continues to implement price increases across several softwood and fluff pulp grades supported by demand growth and capacity expansion. The company also projects softwood and fluff pulp markets to remain relatively stable through 2019, supported by demand growth and limited supply.

Domtar is also well placed to gain from its focus on cost savings, reduced overhead spending and customer portfolio-transition efforts. The company will continue to pursue a balanced approach to the deployment of capital while investing in its growth strategy.

Few Headwinds to Conquer

Domtar's near-term performance is likely to be hurt by rising raw material prices, higher maintenance costs, competitive pressure and unfavorable foreign currency movements.

Bottom Line

Investors can retain the stock at present as it has ample prospects for outperforming its peers in the near future.

Meanwhile, investors interested in the Basic Materials sector can consider better-ranked stocks like Israel Chemicals Ltd. (ICL - Free Report) , Arconic Inc. (ARNC - Free Report) and Materion Corporation (MTRN - Free Report) , each carrying a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Israel Chemicals has an expected earnings growth rate of 13.51% for 2019. The company’s shares have gained 11% in the past year.

Arconic has an estimated earnings growth rate of 36.76% for the current year. The stock has appreciated 45.7% in a year’s time.

Materion has a projected earnings growth rate of 30.25% for the ongoing fiscal. Its shares have rallied 15% over the past year.

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