Domtar (UFS) Well Poised To Grow On Strategic Initiatives

On Jun 13, we issued an updated research report on Domtar Corporation’s (TO:UFS) .

Domtar manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. It also owns and operates an extensive network of strategically located paper and printing supplies distribution facilities. The company is the largest integrated marketer of uncoated freesheet paper in North America with established brands such as Cougar, Lynx Opaque Ultra, Husky Opaque Offset, First Choice and Domtar EarthChoice.

Domtar is a leading fiber-based technology company with a unique expertise in transforming raw materials into products that suit customer requirements. It is currently seeking to grow through profitable investment opportunities with a commitment to pollution-free environment and sustainable practices. The company is also streamlining the cost structure, improving revenue quality and maintaining a healthy cash flow with a disciplined approach to cash utilization.

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. Its investment strategy takes a holistic view of the rapidly evolving market and deploys a dynamic capital allocation approach to execute its growth strategy.

Domtar has grossly underperformed the Zacks categorized Paper and Related Products industry in the last three months with an average decline of 1.4% against a 9.3% gain for the latter. The pulp and paper industry is highly cyclical. Fluctuations in the prices and the demand for the company’s pulp and paper products could result in lower sales volumes and smaller profit margins. The strengthening U.S. dollar against pulp purchasing currencies is expected to hamper price realizations of Domtar's pulp products. In the paper segment, import challenges remain a headwind, although productivity and margin expansion are expected to remain on track. However, long-term trends indicate some weakness in North American paper demand, which could hamper the company’s top line. Global demand for pulp is also likely to be volatile due to the strengthening of U.S. dollar and consumer inventory swings, especially in China.

The company faces tremendous competitive pressure from local as well as some global producers, who often have relatively greater financial resources and lower production costs. As such, Domtar has to make continuous investments in value drivers that act as a hedge against stiff competition, which reduce its profitability to some extent.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry include Mondi (LON:MNDI) plc MONDY, Sappi Limited (OTC:SPPJY) and Stora Enso Oyj (OTC:SEOAY) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mondi is currently trading at a forward P/E of 16.35x.

Sappi has a long-term earnings growth expectation of 2.8%.

Stora Enso has a long-term earnings growth expectation of 3.0%.

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