Best Stocks of 2016: Domtar Corp (USA) (UFS) Is Hurt But Healing

UFS' performance may be a bit uneven in the near-term, but the weakness is a buying opportunity for a long-term position

Editor’s note: This column is part of our Best Stocks for 2016 contest. Hilary Kramer’s pick for the contest is Domtar Corp (USA) (NYSE:UFS).

Best Stocks of 2016: Domtar Corp (USA) (UFS) Is Hurt But HealingWith so many global macroeconomic concerns swirling, big league names carrying massive risk are going to see huge swings in share prices and will probably burn many investors.

That’s why I’m confident that my more defensive, conservative pick for the Best Stocks of 2016 contest, Domtar, should hold up nicely in the second half of the year.

UFS has been somewhat volatile since reporting its first-quarter earnings results, but I think a lot of the recent action has been the result of the over-emotional trading that has hurt much of the market.

The stock has been pressured by global concerns, like the Bank of Japan’s decision not to ease monetary policy, as well as the decline of the Chinese economy and a weak yuan.

Domtar sells 87% of its product in the United States and Canada, so worries that stronger U.S. and Canadian dollars will make the company less price competitive are weighing on the shares.

But the recent Brexit vote has been the most painful factor so far, singlehandedly pushing shares down 6% along with the rest of the market.

Still, results from the company’s first-quarter earnings report were very promising. Because management had preannounced the numbers, there were no surprises: the official reading of $0.35 a share in earnings and revenue of $1.287 billion was in line with the results previously given.

Good Things to Come for UFS?

And there were some encouraging signs beneath the headlines. Operating income for the company’s consumer products business increased from $20 million to $24 million, and UFS was breakeven from a free cash flow perspective despite the high capital expenditures.

Management indicated that they were able to get price increases in softwood pulp and several uncoated free sheet grades, but unfortunately, the company won’t be able to take full advantage of the higher prices as more-than-usual planned downtime will keep second-quarter earnings little changed from the first quarter.

However, lower oil prices should work to Domtar’s advantage as they decrease the value of both the Canadian dollar (which has rallied with oil all year) and the company’s cost structure.

Performance may be a bit uneven in the near-term, but I view the weakness as a buying opportunity for a long-term position. The growth in the company’s consumer products and pulp businesses should continue over time, and because of the selling, UFS is once again highly undervalued.

Domtar shares sell for less than 6x enterprise value to earnings before interest, taxes, depreciation and amortization, and it offers a solid 4.9% dividend yield, which makes this a solid stock to hold onto as we watch for the ride up.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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