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Why Is Domtar (UFS) Up 11.4% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Domtar (UFS). Shares have added about 11.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Domtar due for a pullback? 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's Earnings & Revenues Beat Estimates In Q1

Domtar reported first-quarter 2020 adjusted earnings of 9 cents per share, faring better than the Zacks Consensus Estimate of a loss of 26 cents. However, the bottom-line figure tanked 93.7% from the prior-year quarter figure of $1.44 per share.

Including one-time items, Domtar reported net earnings per share of 9 cents in the first quarter compared with the $1.27 per share recorded in the prior-year quarter.

Consolidated sales were down 7% year over year to $1,278 million, surpassing the Zacks Consensus Estimate of $1,240 million.

Operational Highlight

Consolidated adjusted operating income came in at $19 million in the March-end quarter compared with the year-ago quarter’s $129 million.

Segmental Performance

Quarterly revenues of the Pulp and Paper segment came in at $1,031 million, down 10.9% year over year. Adjusted operating income for the segment was $4 million in the reported quarter, down from the year-earlier reported figure of $144 million.

Sales in the Personal Care segment was up 11.3% year over year to $266 million. The adjusted operating income for the segment came in at $20 million, up from the $6 million reported in the comparable period last year.

Balance Sheet & Cash Flow

The company had cash and cash equivalents of $152 million as of Mar 31, 2020, up from $61 million as of Dec 31, 2019. Net debt-to-total capitalization ratio was 30% as of Mar 31, 2020, up from 27% as of Dec 31, 2019.

Domtar generated $88 million of cash from operating activities in the first quarter compared with the $55 million reported last year.

The company is implementing actions to strengthen its cash flow and improve liquidity. Given the uncertainty of the impact of the COVID-19 outbreak, Domtar has suspended the payment of its regular quarterly dividend and share-repurchase program in order to preserve cash and provide additional flexibility in the current environment.

2020 Outlook

The impact of the coronavirus pandemic on the company’s business operations remains uncertain. Domtar expects lower paper demand in second-quarter 2020. Demand for softwood and fluff pulp will remain strong in the near term on solid growth in tissue and towel, while containment measures to curb the spread of the virus across Europe and North America are expected to hurt certain end-use markets. Personal Care will continue to benefit from higher usage and the impact from new customer wins. Moreover, raw-material costs are expected to be stable. Domtar’s recently-announced capacity-reduction plan will improve its inventory-levels in the near term.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months. The consensus estimate has shifted -27.47% due to these changes.

VGM Scores

At this time, Domtar has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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

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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