Domtar Corporation UFS continues to benefit from cost savings, margin-improvement plan and price increases. Further, the company’s long-term earnings growth rate of 5% makes us confident of its inherent strength.
Let’s delve deeper into the factors that make this stock an attractive investment option.
Upbeat Q4 Guidance: Domtar’s earnings surged 42% on a year-over-year basis in third-quarter 2018, driven by accelerating price realizations and margin expansion, particularly, in the Pulp and Paper businesses. For fourth-quarter 2018, the company expects lower maintenance costs and recently-announced price hikes to aid the Pulp and Paper segment’s results. Domtar will also benefit from its focus on cost savings, reduced overhead spending and customer portfolio-transition efforts.
Segments Poised Well for Growth: Domtar expects to witness upbeat market conditions for the Paper business. The company implemented price hikes this year. In the Pulp business, Domtar has been performing well in recent years, backed by price increases and a solid operational performance. In addition, the company continues to implement price increases across several softwood and fluff pulp grades. It also expects softwood prices to remain relatively stable in the current quarter and through 2019, supported by cyclical-demand growth and a deceleration of capacity expansion.
Further, Domtar will benefit from its focus on margin-improvement plan in the Personal Care Division. Recently, the company’s board of directors approved the permanent closure of its Waco, TX Personal Care manufacturing and distribution facility, the relocation of certain manufacturing assets, and a workforce reduction of approximately 214 employees across the division, as part of this plan. The Waco facility will likely cease operations in third-quarter 2019. The company expects to realize annual benefit of approximately $25-$30 million from the plan.
Solid Zacks Rank, Score Combination
Domtar carries a Zacks Rank #2 (Buy), at present. It has a VGM score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1(Strong Buy) or 2, make solid investment choices.
Domtar’s shares have outperformed the industry over the past year. The stock has depreciated around 6%, while the industry recorded a loss of around 12%.
Other Stocks to Consider
Some other top-ranked stocks in the basic materials space are CF Industries Holdings, Inc. CF, The Mosaic Company MOS and Ashland Global Holdings Inc. ASH. While CF Industries and Mosaic sport a Zacks Rank #1, Ashland Global carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
CF Industries has a long-term earnings growth rate of 6%. The stock has gained around 20% in a year’s time.
Mosaic has a long-term earnings growth rate of 7%. Its shares have surged 49% in the past year.
Ashland Global has a long-term earnings growth rate of 10%. The company’s shares have been up 16% during the past year.
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