Domtar Rides On Solid Price Momentum & Cost Optimization

On Jun 4, we issued an updated research report on, Domtar Corporation (TO:UFS) .

The paper & paper products firm continues to benefit from strong price momentum in the Pulp and Paper businesses. Manufactured paper shipments in first-quarter 2018 were 3% higher year over year while average transaction prices for all paper grades increased $3 per ton. Average pulp prices increased $144 per metric ton from the year-ago quarter on solid global demands. Consequently, first-quarter revenues of the Pulp and Paper segment came in at $1,100 million, up 3% year over year.

Sales from the Personal Care segment also improved 6% year over year to $262 million as adult incontinence and infant diaper volumes grew 2% and 4%, respectively. This helped the company to record consolidated first-quarter sales of $1,345 million compared with $1,302 million in the year-earlier quarter, outpacing the Zacks Consensus Estimate of $1,339 million.

Consolidated operating income for the quarter improved to $77 million from $38 million in the year-ago period. Higher productivity, low maintenance expenses and optimization of SG&A expenses were the primary reasons for the year-over-year improvement in operating income.

The company further witnessed an uptrend in prices for uncoated freesheet in April on healthy demand trends. Buoyed by improving growth dynamics, Domtar announced a $40 to $60 price increase on softwood and fluff pulp grades for May shipments in North America and Europe.

Domtar is currently seeking growth 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.

With a diligent execution of operational plans, the stock has outperformed the industry in the past year with an average return of 29.8% compared with 16.8% rise for the latter.

However, given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. A geopolitical impasse due to various conflicts and disruptions may further affect its international operations in key markets. Revamped market dynamics following Brexit are also expected to affect firms like Domtar that has significant presence in the U.K. The company is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #1 (Strong Buy) stock. Some other stocks worth considering in the industry are Sappi Limited (OTC:SPPJY) , Stora Enso Oyj (OTC:SEOAY) and UPM-Kymmene Oyj (OTC:UPMKY) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sappi Limited has a long-term earnings growth expectation of 6.9%.

Stora Enso Oyj has a long-term earnings growth expectation of 6.9%.

UPM-Kymmene Oyj has a long-term earnings growth expectation of 6.5%.

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