Domtar Upgraded to Buy - Analyst Blog

On March 29, Zacks Investment Research upgraded paper products manufacturer Domtar Corporation UFS to a Zacks Rank #2 (Buy) from a Zacks Rank #3 (Hold) primarily driven by rising earnings estimates and a spurt in share prices.

Why the Upgrade?

Shares of Domtar scaled a new 52-week high of $115.75 on March 28, before closing the trading session a little lower at $115.13. This translates to a healthy year-to-date return of 50.2%. Domtar's share prices have been on a steady uptrend since Sep 2013. The stock is currently trading at a forward P/E of 12.1x and has a long-term earnings growth expectation of 3.0%.

Domtar has been looking promising for quite some time now on the back of solid organic and inorganic growth. Moreover, Domtar is also restructuring its portfolio by hiving off assets which do not match its core competencies.

Domtar expects its pulp business to benefit from accelerating global demand, particularly led by China. The company has increased prices for several paper grades, which in turn are expected to augment its revenues toward the end of the current quarter.

In December last year, Domtar's wholly-owned subsidiary had entered into a definitive agreement with Windmill Development Group Ltd., for the sale of the erstwhile Domtar paper mill sites in Ottawa, Ontario and Gatineau, Quebec. The company also announced the acquisition of privately-held Spanish firm Laboratorios Indas in Nov 2013 to expand its personal care business in Europe.

The solid fundamentals find confirmation in positive estimate changes, driving the Zacks Consensus Estimate higher both for the current quarter as well as for the full year. The Zacks Consensus Estimates for the ongoing quarter and full year are currently at $1.99 and $9.51, respectively, both representing more than a two-fold year-over-year growth.

Other Stocks to Consider

Other stocks to watch out for in the industry include Fibria Celulose SA FBR, Neenah Paper, Inc. NP and Resolute Forest Products Inc. RFP, each carrying a comparable Zacks Rank #2 (Buy).