Domtar Surprises With 3Q Profit; KeyBanc Sticks To Hold

Domtar Corp.’s 3Q revenues of $1.12 billion beat the Street consensus of $1.09 billion but fell 12.4% from the year-ago quarter. However, its top-line improved 11.1% from the second quarter on higher paper shipment volumes. The paper mill company’s 3Q earnings of $0.33 per share declined about 63% year-on-year but came ahead of the analysts’ estimate of a loss of $0.24.

Domtar (UFS) said that its manufactured paper shipments grew 20% in 3Q when compared to 2Q. Domtar’s CEO John D. Williams said “Our results in Paper significantly improved in the third quarter reflecting a strong operational performance and our team’s fast response in implementing cost savings in a better paper demand environment. In Pulp, prices remain at cyclically low levels but the supply and demand balance is improving.”

As for 4Q, the company forecasts paper volume to remain flat quarter-over-quarter. Domtar said “We expect near-term pulp markets to continue to gradually improve driven by better demand, maintenance outages and restocking in China.” The company expects “Personal Care to continue to benefit from higher usage and the impact from new customer wins.” Domtar also foresees raw material costs to remain stable with lower planned maintenance costs. (See UFS stock analysis on TipRanks).

Following the 3Q results, KeyBanc analyst Adam Josephson said that “Domtar’s ownership of Personal Care has likely boosted its historical multiple to some extent.” He maintained a Hold rating on the stock, saying that “We think Domtar’s multiple relative to the containerboard stocks is attractive, though we think its absolute valuation is reasonable.”

Currently, the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 4 Buys, 4 Holds and 1 Sell. The average price target of $33.43 implies upside potential of about 26.8% to current levels. Shares have dropped 31.1% year-to-date.