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Domtar (UFS) Misses on Q4 Earnings Estimates, Stock Down

Paper & paper products manufacturer Domtar CorporationUFS reported lackluster fourth-quarter 2016 results with adjusted earnings of $47 million or 75 cents per share compared with $70 million or $1.11 per share in the year-ago quarter. The year-over-year decline in adjusted earnings was primarily due to lower selling prices and higher costs. Adjusted earnings for the reported quarter widely missed the Zacks Consensus Estimate of 91 cents.

Share prices fell 4.2% during trading hours post the earnings release to eventually close at $41.04 as of Feb 9.

Fourth-quarter GAAP net income was $47 million or 75 cents per share compared with $57 million or 91 cents per share in the year-earlier quarter. For full-year 2016, GAAP earnings were $128 million or $2.04 per share compared with $142 million or $2.24 per share in 2015. Adjusted earnings for 2016 decreased to $178 million or $2.84 per share from $211 million or $3.33 per share in 2015.

Sales in the reported quarter were $1,274 million compared with $1,314 million in the prior-year quarter and missed the Zacks Consensus Estimate of $1,319 million. For 2016, Domtar recorded sales of $5,098 million compared with $5,264 million in 2015.

Operating income for the reported quarter declined to $74 million from $94 million in the year-ago quarter. The year-over-year decrease in operating income was driven by lower average selling prices, higher raw material costs, lower productivity and higher maintenance costs, partially offset by an increase in pulp sales volume and favorable exchange rates.

Segment Performance

Pulp and Paper: Sales from this segment were $1,046 million compared with $1,110 million in the year-ago period. Operating income declined to $74 million from $86 million in the year-ago quarter on lower average selling prices. Paper inventories decreased 22,000 tons while pulp inventories increased 19,000 metric tons sequentially. Domtar registered record softwood pulp shipments during the quarter with significant growth in China.

Personal Care: Sales were $242 million compared with $221 million in the year-earlier quarter, while operating income was $13 million versus $16 million in the year-ago quarter. The reported quarter represented the highest Personal Care sales and EBITDA (earnings before interest, tax, depreciation and amortization) of the year as the business is gaining traction in North America and Europe in the adult incontinence and infant care categories. Domtar is scaling up capabilities in the rapidly growing direct-to-consumer channel, while expanding partner-brand strategy to improve sales and margins.

Other Significant Developments

During the reported quarter, the company completed the acquisition of privately-held Home Delivery Incontinent Supplies Co., announced in August. The strategic acquisition will expand the Personal Care segment of Domtar with complementary products.

During 2016, Domtar shut the largest paper machine in the U.S. at the Ashdown mill as it converted the Ashdown paper machine to fluff pulp production. With the Ashdown fluff pulp line and the streamlining of Plymouth, the company has approximately 2 million ton market pulp business that is well positioned for long-term growth.

Domtar Corporation Price, Consensus and EPS Surprise

Domtar Corporation Price, Consensus and EPS Surprise | Domtar Corporation Quote

Balance Sheet

Cash and cash equivalents totaled $125 million as of Dec 31, 2016 while long-term debt was $1,218 million, compared with the respective tallies of $126 million and $1,210 million in the year-ago period. Cash flow from operating activities totaled $465 million for 2016 compared with $453 million in 2015. Domtar's net debt-to-total capitalization ratio was 30% as of Dec 31, 2016.

Moving Forward

The company expects paper shipments to be in line with market demand in 2017, while pulp shipments are anticipated to be higher due to the conversion of a paper machine to a fluff pulp line. However, Domtar expects some volatility in softwood and fluff pulp markets due to strength in U.S. dollar and new capacity additions. Operating costs are likely to marginally increase. In Personal Care, investments in advertising and promotion in addition to new customer wins should drive higher sales.

Domtar presently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Fibria Celulose S.A. FBR , P. H. Glatfelter Company GLT and Svenska Cellulosa Aktiebolaget SCA (publ) SVCBY , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Fibria Celulose has a VGM Score of A.

P. H. Glatfelter has a long-term earnings growth expectation of 10% and is currently trading at a forward P/E of 16.0x.

Svenska Cellulosa has a long-term earnings growth expectation of 6% and is currently trading at a forward P/E of 18.3x.

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Domtar Corporation (UFS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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