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Is Domtar Corporation (DFS) a Good Stock for Value Investors?

Zacks

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Domtar Corporation UFS stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Domtar Corporation has a trailing twelve months PE ratio of 17.6, as you can see in the chart below:



This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.5. While Domtar Corporation’s current PE level puts it above its midpoint of 13.1 over the past five years, it stands well below the highs for the stock – suggesting that it could be a great entry point.



Further, the stock’s PE is almost in line with the Zacks Basic Materials sector’s trailing twelve months PE ratio, which stands at 17.83. At the very least, this indicates that the stock is quite fairly valued right now, compared to its peers.



We should also point out that Domtar Corporation has a forward PE ratio (price relative to this year’s earnings) of just 15.0, so it is fair to say that a slightly more value-oriented path may be ahead for Domtar Corporation stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Domtar Corporation has a P/S ratio of about 0.6. This is much lower than the S&P 500 average, which comes in at 3.3 right now.



Broad Value Outlook

In aggregate, Domtar Corporation currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Domtar Corporation a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the P/CF ratio (another great indicator of value) for Domtar Corporation is just 2.7, a level that is far lower than the industry average of 8.0. Clearly, UFS is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Domtar Corporation might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of B and a Momentum Score of D. This gives UFS a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been somewhat encouraging. The current quarter has seen one upward estimate revision in the past sixty days compared to no downward revisions, while the full year estimate has seen one upward and downward revision each in the same time period.

This has had a positive impact on the consensus estimate though as the current quarter consensus estimate has risen by a notch in the past two months, while the full year estimate has increased 4.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Domtar Corporation Price and Consensus

Domtar Corporation Price and Consensus | Domtar Corporation Quote


However, this somewhat bullish trend has likely not yet been reflected in the stock, as we have just a Zacks Rank #3 (Hold), which indicates expectations of in-line performance in the near term. Nonetheless, the positive analyst sentiment hints at favorable near-term prospects.

Bottom Line

Domtar Corporation is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite having a Zacks Rank #3, the stock belongs to an industry which is ranked among the Top 17% out of more than 250 Zacks industries, which indicates that broader factors are favorable for the company. Further, over the past two years, the industry has surpassed the broader market, as you can see below:



So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.

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