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Domtar (UFS) Down 7.2% 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 7.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Domtar Q1 Earnings Surpass Estimates, Improve Y/Y

Domtar delivered first-quarter 2019 adjusted earnings of $1.44 per share beating the Zacks Consensus Estimate of $1.34 by a margin of 7%. The bottom line also marked a significant improvement from the prior-year quarter’s earnings of 87 cents. Price and volume momentum in paper drove the results.

Including one-time items, Domtar reported earnings per share of $1.27 in the quarter, up 48% from 86 cents per share reported in the year-ago quarter.
 
Consolidated sales went up 2.3% year over year $1,376 million but fell short of the Zacks Consensus Estimate of $1,441 million. Quarterly revenues of the Pulp and Paper segment came in at $1,147 million, up 4% year over year. Sales from the Personal Care segment declined 6% year over year to $247 million.

Consolidated adjusted operating income came in at $129 million, up 65% from the year-ago quarter’s figure of $78 million. Adjusted operating income for the Pulp and Paper segment was $144 million in the reported quarter, up from $75 million in the prior-year quarter. The adjusted operating income for the Personal Care segment declined 25% year over year to $6 million.

Balance Sheet & Cash Flow

At the end of the fiscal first quarter 2019, the company had cash and cash equivalents of $94 million, down from $111 million at the end of 2018. Long-term debt was $853 million as of Mar 31, 2019 flat compared with Dec 31, 2017.
 
Domtar generated $55 million of cash from operating activities during the first quarter of 2019, compared with $90 million reported in the prior-year quarter.
 
Moving Forward

The company anticipates seasonally higher maintenance activity owing to annual shutdowns at some of its major facilities to negatively impact Pulp and Paper business’ results in the second quarter of 2019. However, Domtar expects paper shipments to benefit from higher demand from customers following the industry capacity closures. Paper prices will continue to improve in the wake of the recently announced price increases. Personal Care is anticipated to benefit from the company’s margin improvement plan and the ramp-up of a new customer. However, raw material cost inflation will remain a hindrance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.18% due to these changes.

VGM Scores

At this time, Domtar has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Domtar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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