Domtar Corp (USA) (UFS): A Good Investment Opportunity in the Pulp & Paper Industry

I like to screen for stocks which have experienced significant fall on the market in the past half a year. The fall of the share price makes investment costs lower, enhancing investors’ returns in the future as long as the business and its assets remains intact. Domtar Corp (USA) (NYSE:UFS) has decreased by nearly 18.5% since the beginning of the year, underperforming the S&P 500’s gain of more than 13.2%. Interestingly, Domtar is in the portfolios of famous investors Ray Dalio and Joel Greenblatt. Is Domtar Corp (USA) (NYSE:UFS) a good buy now? Let’s find out.

A cash cow with conservative balance sheet and cheap valuation

Domtar is the manufacturer and distributor of fiber-based products including packaging papers and communication papers. It operates in three main business segments: Pulp and Paper, Distribution and Personal Care. Most of its revenue, $4.58 billion, or around 80% of the total revenue, were generated from the Pulp and Paper segment. The Distribution segment ranked second with $685 million in 2012 revenue. The Pulp and Paper segment was the main income generator, contributing $361 million in profits while the Distribution segment’s income was a negative number of $(16) million.

What I like about Domtar Corp (USA) (NYSE:UFS) is its consistent positive cash flow generating capabilities. In the past five years, Domtar’s operating cash flow fluctuated in the range of $197 million to nearly $1.17 billion. In 2012, the company’s operating cash flow came in at $551 million while its free cash flow was $315 million. Domtar Corp (USA) (NYSE:UFS) employed a reasonable amount of leverage. As of March 2013, it had $2.84 billion in equity, $513 million in cash and more than $1.1 billion in debt. The company’s goodwill and intangible assets stayed at $565 million. Consequently, its tangible book value was nearly $2.28 billion.

Recently, the company has agreed to acquire Associated Hygienic Products (AHP), the biggest maker of store brand infant diapers in the U.S. The total value of the transaction is $272 million. The acquisition of AHP will allow Domtar to expand its footprint in the personal care business. AHP delivered around $320 million in sales with an EBITDA (earnings before interest, taxes, depreciation and amortization) of $31 million. The company expects that the acquisition will deliver synergies of $10 million.

Domtar Corp (USA) (NYSE:UFS) is trading at around $68 per share, with a total market cap of $2.3 billion. The market values Domtar quite cheaply at only 3.9 times its trailing EBITDA. What might also make Domtar Corp (USA) (NYSE:UFS) interesting to income investors is its decent dividend yield at 3.3%.