Domtar (UFS) Plagued By Macroeconomic Woes Post Brexit

On Jul 12, Zacks Investment Research updated the research report on paper and paper goods manufacturer Domtar Corporation (TO:UFS) .

Domtar is a leading fiber-based technology company with a unique expertise in transforming raw materials into products that suit customer requirements. The company is currently seeking growth through profitable investment opportunities with a commitment to pollution-free environment and sustainable practices. Domtar is also streamlining the cost structure, improving revenue quality and maintaining a healthy cash flow with a disciplined approach to cash utilization.

The pulp and paper industry is highly cyclical. Fluctuations in the prices and demand for the company’s pulp and paper products have historically resulted in lower sales volumes and smaller profit margins. The strengthening U.S. dollar against pulp purchasing currencies is expected to hamper price realizations of Domtar's pulp products. In the paper segment, import challenges remain a headwind, although productivity and margin expansion are expected to remain on track. The long-term trends indicate some weakness in North American paper demand, which could hamper the company’s top line. Global demand for pulp is also likely to be volatile due to appreciation of the U.S. dollar and swings in consumer inventory, especially in China.

Given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. Any future slowdown in the global economy or the manufacturing industry as a whole, particularly in the aftermath of the Brexit referendum, will have an adverse impact on its business, hampering its long-term growth potential.

The revamped market dynamics following Brexit are expected to affect firms like Domtar that has significant presence in the U.K. The company is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

However, Domtar’s investment strategy takes a holistic view of the rapidly evolving market and deploys a dynamic capital allocation approach to execute its growth plan. A steady dividend payment policy is also part of Domtar’s long-term strategy of providing attractive risk-adjusted returns to its stockholders. In addition, the company has historically repurchased shares as part of its balanced approach to deploy capital.

Nevertheless, this Zacks Rank #5 (Strong Sell) stock appears to be weighed down by macroeconomic factors. Some better-ranked stocks in the paper & related products industry include Resolute Forest Products Inc. (NYSE:RFP) and UPM-Kymmene Oyj (OTC:UPMKY) , both carrying a Zacks Rank #2 (Buy), and Orchids Paper Products Company (NYSE:TIS) , sporting a Zacks Rank #1 (Strong Buy).

DOMTAR CORP (UFS): Free Stock Analysis Report

UPM-KYMMENE ADR (UPMKY): Free Stock Analysis Report

ORCHIDS PAPER (TIS): Free Stock Analysis Report

RESOLUTE FOREST (RFP): Free Stock Analysis Report

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