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Reasons Why You Should Hold Domtar (UFS) Stock Right Now

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Domtar Corporation UFS is expected to perform well on improvement in paper shipments. Further, focus on cost savings, new customer wins and price increases will drive growth. However, freight cost inflation, cyclical nature of pulp and paper industry and adverse foreign currency translation will impede its performance.

This Zacks Rank #3 (Hold) company has an estimated long-term earnings growth rate of 5%.

Below, we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Domtar

Positive Earnings Surprise History

Domtar outpaced the Zacks Consensus Estimate in two of the last four quarters, with an average beat of 11.00%.

Northbound Estimate Revisions

Domtar has been witnessing upward estimates revisions over the last 90 days. The Zacks Consensus Estimate for earnings moved up 6% to $3.84 for 2018 and 19% to $4.48 for 2019. A positive trend in estimate revisions reflects optimism in the company’s prospects.

Price Performance

Domtar’s shares have outperformed the industry over the past year. The stock has gained around 16%, while the industry recorded growth of 3%.

Growth Drivers in Place

Domtar’s results will be aided by  improvement in paper shipments this year as market conditions and order books continue to be favorable for its Pulp and Paper businesses. Further, both businesses will witness impressive sales momentum and cash flow. Domtar will also benefit from its focus on cost savings, reduced overhead spending and customer portfolio-transition efforts.

Domtar is expected to gain from price increases in paper which will positively impact results in second-half 2018. The company’s Pulp business will benefit from lower planned maintenance costs. It also expects moderate inflation in costs in the second half of the year. In addition, Domtar anticipates to witness margin improvement toward the end of this year as benefits of new customer wins flow through.

Its fluff business is poised to gain from continued price hikes in Asia, North America and Europe. The fluff pulp mix from Ashdown mill grew to 75% of market shipments in the second quarter, supporting the improved quality and qualification of Ashdown fluff in multiple regions. The company is focused on optimizing inventory and supply chain from the Plymouth and Ashdown mills to penetrate further into key markets.

Headwinds for Domtar

Domtar’s performance will be negatively impacted by foreign-exchange volatility, moving ahead. Given its international presence, the company often faces unfavorable foreign-currency movement which hurts its top-line growth. Further, freight cost inflation will dampen Domtar’s performance in third-quarter 2018.

Notably, the pulp and paper industry is highly cyclical. Fluctuations in the prices and the demand for the company’s pulp and paper products may result in lower sales volumes and narrower profit margins. In the paper segment, import challenges remain a headwind, although productivity and margin expansion will likely remain on track. Long-term trends indicate some weakness in North American paper demand, which may hamper the company’s top line. Global demand for pulp is also likely to be volatile due to consumer inventory swings, especially in China.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.

Stocks to Consider

Some better-ranked stocks in the same sector are Quaker Chemical Corporation KWR, Air Products and Chemicals, Inc. APD and Cabot Corporation CBT. While Quaker Chemical sports a Zacks Rank #1 (Strong Buy), Air Products and Cabot Corporation carry a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Quaker Chemical has a long-term earnings growth rate of 11%. The stock has rallied 35% in a year’s time.

Air Products has a long-term earnings growth rate of 13.3%. The company’s shares have gained 11% during the past year.

Cabot Corporation has a long-term earnings growth rate of 11%. Its shares have gained 10% over the past year.

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