Domtar To Gain From Margin-Expansion Plan Amid Input Cost Woes

On May 15, we issued an updated research report on Domtar Corporation (TO:UFS) . The company’s performance will be driven by healthy demand in the paper and pulp markets, cost savings, margin-improvement plan and price increases. However, results may be affected by seasonally higher maintenance activity, rising raw-material prices and unfavorable foreign currency movements.

Domtar reported first-quarter 2019 adjusted earnings per share of $1.44, marking a significant improvement from the prior-year quarter’s earnings per share of 87 cents. Price and volume momentum in paper contributed to the impressive results. Consolidated sales went up 2.3% year over year $1,376 million.

Notably, the Zacks Consensus Estimate for 2019 earnings is currently pegged at $5.29, calling for year-over-year growth of 14.7%. The same for second-quarter 2019 is pegged at $1.02, indicating year-over-year growth of 57%.

Share Price Performance

Shares of Domtar have declined 0.1% over the past year compared with the industry’s loss of around 35.1%.

Margin-Improvement Plan to Aid Personal Care Segment

Domtar announced a margin-improvement plan in the Personal Care Division. As part of this, 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-expansion plan and new customer wins this year.

Solid Demand Drives Pulp & Paper Markets

Domtar expects to witness upbeat market conditions for its Paper business. In 2019, the company anticipates higher paper shipments owing to elevated demand from customers following the industry capacity closures. The company anticipates positive momentum in the paper and pulp markets, aided by healthy demand. It remains well poised for margin expansion over the balance of the year. In the Pulp business, Domtar has performed well in recent years, backed by price increases and a solid operational performance.

In addition, the company continues to implement price increases across several softwood and fluff pulp grades supported by demand growth and capacity expansion. Domtar also expects softwood and fluff pulp markets to remain relatively stable through the current year, supported by demand growth and limited supply.

Poised to Gain From Cost-Reduction Action

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.

Few Headwinds to Counter

Domtar anticipates that seasonally higher maintenance activity owing to annual shutdowns at some of its major facilities will hurt the Pulp and Paper business’ performance in the current quarter. Raw material continues to surge and the company expects these conditions to prevail, which will strain margins. Furthermore, given its international presence, Domtar often faces unfavorable foreign-currency movements, hurting the company’s top-line growth.

Domtar Corporation Price and Consensus

Zacks Rank & Stocks to Consider

Domtar currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials space are Israel Chemicals Ltd. (NYSE:ICL) , Arconic Inc. (NYSE:ARNC) and Arch Coal Inc. (NYSE:ARCH) , each carrying a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Israel Chemicals has an expected earnings growth rate of 13.51% for 2019. The company’s shares have gained 17.3% in the past year.

Arconic has an estimated earnings growth rate of 31.62% for the current year. The stock has appreciated 22.5% in a year’s time.

Arch Coal has a projected earnings growth rate of 16.7% for the ongoing year. Its shares have rallied 17.7% over the past year.

Radical New Technology Creates $12.3 Trillion Opportunity

Imagine buying Microsoft (NASDAQ:MSFT) stock in the early days of personal computers… or Motorola (NYSE:MSI) after it released the world’s first cell phone. These technologies changed our lives and created massive profits for investors.

Today, we’re on the brink of the next quantum leap in technology. 7 innovative companies are leading this “4th Industrial Revolution” - and early investors stand to earn the biggest profits.

See the 7 breakthrough stocks now>>