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Domtar (UFS) Down 12.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Domtar (UFS). Shares have lost about 12.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Domtar due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Domtar Q2 Earnings & Revenues Miss Estimates, Down Y/Y

Domtar delivered second-quarter 2019 adjusted earnings of 57 cents per share, missing the Zacks Consensus Estimate of 87 cents. The bottom-line figure also marked a decline from the prior-year quarter’s earnings of 65 cents.

Including one-time items, Domtar reported earnings per share of 28 cents in the quarter, significantly down 58.8% from 68 cents per share recorded in the year-ago quarter.

Consolidated sales went down 2.6% year over year to $1,317 million, missing the Zacks Consensus Estimate of $1,389 million.

Operational Highlight

Consolidated adjusted operating income came in at $57 million compared with the year-ago quarter’s $59 million. The operating income during the June-end quarter declined due to higher maintenance costs, lower productivity, higher fixed costs, lower volume in paper, and elevated raw material and freight costs. However, these factors were partly offset by lower selling, general and administrative expenses.

Segmental Performance

Quarterly revenues of the Pulp and Paper segment came in at $1,096 million, down 2.4% year over year. Elevated level of outages affected productivity in the Pulp and Paper segment during the second quarter. Adjusted operating income for the segment was $62 million in the reported quarter, down from $76 million recorded in the year-earlier quarter.

Further, sales in the Personal Care segment declined 4% year over year to $237 million. Permanent closure of the Waco, TX facility, resulting in lower overall production volumes, thwarted the segment’s performance. The adjusted operating income for the segment came in at $5 million, up from the $2 million reported in the comparable period last year.

Balance Sheet & Cash Flow

At the end of the second quarter, the company had cash and cash equivalents of $93 million, down from $111 million recorded at the end of 2018. Long-term debt was $824 million as of Jun 30, 2019, compared with $853 million as of Dec 31, 2018.

Domtar generated $174 million of cash from operating activities during the six-month period ended 2019, compared with $267 million reported in the comparable period last year.

Outlook

The company expects improved paper volume for the current year. The Personal Care segment is anticipated to benefit from its margin-improvement plan and increased sales volume, aided by a strong order book. Nevertheless, Domtar forecasts volatility in the softwood and fluff pulp markets, and cost inflation for the ongoing year.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -35.81% due to these changes.

VGM Scores

Currently, Domtar has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Domtar has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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