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Here's Why Investors Should Ignore Domtar (UFS) Stock Now

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Domtar Corporation UFS is being weighed down by higher maintenance costs, competitive pressure and volatile demand for softwood and pulp. Weak price performance and lowered earnings estimates do not instill investor confidence in the stock.
The company, with a market capitalization of $2.3 billion, carries a Zacks Rank #5 (Strong Sell) at present. In the past six months, the company’s shares have fallen 2.5% against the industry’s growth of 11%.

Factors Weighing on Domtar

Domtar reported third-quarter 2019 adjusted earnings of 89 cents per share, which reflected a year-over-year decline of 35% thanks to lower selling prices in pulp, market-related downtime costs and the Espanola outage. Consolidated sales declined 6% year over year to $1,283 million.

For fourth-quarter 2019, Domtar anticipates seasonally higher maintenance activity owing to annual shutdowns at some of its major facilities to hurt the Pulp and Paper business’ results. Further, the Paper segment is likely to be affected by a seasonally unfavorable mix. The fourth-quarter results are also likely to show increased maintenance activity.

Domtar expects raw-material cost inflation to continue to weigh on margins. Global demand for softwood and pulp is also likely to be volatile owing to consumer inventory swings and macroeconomic conditions.

The company faces tremendous competitive pressure from local, and some global producers, which often possess relatively greater financial resources and lower production costs. As such, Domtar has to make continued investments in value drivers, which act as a hedge against stiff competition but reduce its profitability to some extent. Also, given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. The ongoing slowdown in the manufacturing industry continues to have an adverse impact on business.

Bottom-Line Estimate Trend

The Zacks Consensus Estimate for Domtar’s    fiscal 2020 earnings has declined 10% in the past 90 days. The Zacks Consensus Estimate for earnings per share is currently pegged at $2.41 for the fiscal, suggesting a year-over-year decline of 23.9%.

Stocks to Consider

Some better-ranked stocks in the Basic Materials Sector are Daqo New Energy Corp DQ, Commercial Metals Company CMC and Silver Standard Resources Inc. SSRM. All of these stocks carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Daqo New Energy has a projected earnings growth rate of 326.3% for the current year. The company’s shares have gained 26% over the past six months.

Commercial Metals has an estimated earnings growth rate of 17.2% for the ongoing year. The stock has gained 22% over the past six months.

Silver Standard Resources has an estimated expected earnings growth rate of 40.6% for fiscal 2020. The company’s shares have gained 12% in the past six months.

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