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Will Balanced Capital Deployment Aid Domtar’s (UFS) Growth?

Zacks

On Aug 9, we issued an updated research report on Domtar Corporation UFS. The company is poised to gain from its balanced capital-deployment approach. Further, improvement in paper shipment, reduced overhead spending, new customer wins and price increases will drive growth.

Let’s illustrate these growth factors in detail.

Domtar to Grow on Balanced Capital-Deployment Approach

Domtar will continue to pursue a balanced approach toward capital deployment while focusing on investing in innovation. One recent investment was in Prisma Renewable Composites, which will help it commercialize the process of using lignin to make engineered plastic compounds, and other high-value fiber and lignin applications.

Domtar has also prioritized reinvesting in assets, notably in pulp mills. In addition, the company will invest in its next re-purposing opportunity. In line with this, it conducted an asset review over the last several quarters. This review will enable the company identify assets having long-term growth prospects, mainly around coated freesheet, while looking at the feasibility of other grades, including linerboard and pulp.

Improvement in Paper Shipment to Drive Results

Domtar expects to benefit from improvement in paper shipment this year. Market conditions and order books continue to be favorable for the Pulp and Paper businesses. Furthermore, both businesses will witness impressive sales momentum and cash flow. The company will also benefit from its focus on cost savings, reduced overhead spending and customer portfolio-transition efforts.

Price Increases to Assist Margin Performance

Domtar is expected to gain from price increases in paper which will positively impact results in second-half 2018. Its Pulp business will benefit from lower planned maintenance costs. The company also expects costs inflation to moderate in the second half of the year. In addition, Domtar anticipates to witness margin improvement toward the end of 2018, as the benefits of new customer wins flow through.

Share Price Performance

Over the past year, Domtar has outperformed the industry it belongs to. The company’s shares have jumped around 31% compared with 18% growth recorded by the industry during the same time frame.



Zacks Rank & Other Stocks to Consider

Domtar carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the same sector are KapStone Paper and Packaging Corporation KS, Stora Enso Oyj SEOAY and Svenska Cellulosa AB SVCBY. While KapStone Paper sports a Zacks Rank #1 (Strong Buy), Stora Enso and Svenska Cellulosa carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

KapStone Paper has a long-term earnings growth rate of 14%. The stock has rallied 59% in a year’s time.

Stora Enso has a long-term earnings growth rate of 11.9%. Its shares have improved 27% over the past year.

Svenska Cellulosa has a long-term earnings growth rate of 19.1%. The company’s shares have gained 23% during the past year.

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