Domtar: Paper Isn't Dead Yet

Aug. 8.07 | About: Domtar Corporation (UFS)

Despite the predictions a few years ago that email would mean the end of paper, the Canadian company Domtar Corp. (NYSE:UFS) has managed to hold on.

The paper industry isn't easy -- there are constant concerns about demand, freight costs (paper isn't light), tight margins, pricing issues, and rising energy costs -- but the fact is there will always be a need for paper products, and a company like Domtar has the potential to make steady profits if it handles its risks properly.

Domtar finished its acquisition of Weyerhaeuser Fine Paper back in March, and this deal was part of a larger corporate strategy of growth through acquisition. This is always a risky way to grow, of course, but Domtar has also been investing in technologies to cut costs and integrate its acquisitions, and as this strategy is implemented we may well see Domtar increase its margins as well as its revenues. The company has also closed a number of its less successful factories, cutting overhead costs and personnel costs, and this too will help increase profitability for Domtar.

2006 had a couple very rough quarters for Domtar, but the company delivered solid earnings in the first quarter, and the analysts at Goldman Sachs predict this growth will continue over the next couple years. They like the fact that Domtar has cut costs and also closed factories, and they believe the company has the ability to increase pricing on its "uncoated free sheets" (UCFS) over the coming years. Other analysts are less optimistic given all of the risks mentioned above, and they argue that there isn't the pricing flexibility to enable Domtar to increase its margins.

I like this company, though, for its long-term strategy and I think at the right discount it could prove to be a nice value buy.

Type of Stock: One of the largest paper companies in North America.

Price Target: UFS is currently trading under $9, toward the low end of its range since being listed on the NYSE six months ago. Goldman has predicted this stock will rise above $16. That may be high, but I do think UFS is unlikely to dip much more and may well grow as its cost cutting and acquisitions take effect. Second quarter results will be reported Monday, August 13, so be sure to keep an eye on this one.

UFS 1-yr chart: