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Domtar Rides on Margin-Expansion Plan Amid Higher Input Cost

Zacks Equity Research

On Dec 11, we issued an updated research report on Domtar Corporation UFS. The company’s performance will be driven by healthy demand in the paper and pulp markets, cost savings and margin-improvement plan. However, results may be affected by seasonally higher maintenance activity, rising raw-material prices and unfavorable foreign-currency movements.

Share Price Performance

Shares of Domtar have depreciated 0.5% over the past year compared with the industry’s loss of around 8.8%.



Margin-Improvement Plan to Aid Personal Care Segment

Domtar continues to deliver on its 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.

This May, the Waco facility permanently ceased its operations. In the fourth quarter, the Personal Care division is anticipated to benefit from improved margins and solid sales, aided by a stronger order book. The company is also ramping up new business in the segment and looking forward to volume growth in the days ahead.

Solid Demand Drives Pulp & Paper Markets

Domtar expects to witness improved paper volume and relatively stable paper prices for the remainder of this year. Paper supply are anticipated to trend with customers demand. The company expects productivity and manufacturing costs will likely witness continued improvement in the Pulp and Paper business. The company expects supply and demand to be balanced over the short- to medium term. It also expects improved market conditions, supported by a favorable supply and demand outlook, for the softwood grades over the long term.

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 by investing in core businesses, innovation, while returning capital to shareholders. Also, the company is focused on maintaining the flexibility to pursue its growth strategy and investment in repurposing opportunity.
 
Few Headwinds to Counter

Domtar anticipates that seasonally higher maintenance activity due to annual shutdowns at some of its major facilities will hurt the Pulp and Paper business’ performance in the ongoing quarter. Raw-material cost 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.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are General Moly, Inc GMO, Franco-Nevada Corporation FNV and Agnico Eagle Mines Limited AEM, 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.

General Moly has an expected earnings growth rate of 12.5% for the current fiscal year. The company’s shares have gained 47.3% in the past year.

Franco-Nevada has a projected earnings growth rate of 45.3% for 2019. The company’s shares have rallied 38.7% in a year.

Agnico Eagle has an estimated earnings growth rate of 167.9% for the ongoing year. Its shares have moved up 51% in the past year.

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