Raising Estimates — CSFB is increasing their fourth quarter 2009 EPS estimate by $0.20 to $1.00, bringing their full-year estimate to $0.78. More importantly, the firm is moving their 2010 EPS estimate to a Street-high $5.00 from $2.80. Their 2010 estimate still assumes some correction in pulp prices (from announced February levels), and that only about half of the current $40/ton uncoated free sheet price increase sticks. CSFB notes their estimates could prove conservative (again) without a pulp-price correction in 2010.
Focus on Free Cash — CSFB now sees 2010 free cash flow of about $16 per share, on top of an estimated $14 in 2009. About 35% of these two years' massive free cash generation is from the alternative fuels mixture ("black liquor") credits generated during 2009 (and collected over both years). Beyond 2010, aided by high DD&A, they see free cash flow exceeding earnings by $2-$6 per share, depending on capital spending levels.
Net Debt Evaporating — At the time of the 2007 Weyerhaeuser uncoated free sheet business deal three years ago, Domtar's net debt was $58 per share and the stock reached $138/share, making Domtar's enterprise value over $190/share. At the end of 2009, the firm estimates that net debt per share was down to $1.175 billion ($27/share), net of the estimated $300 million tax credit receivable. By the end of 2010, they estimate net debt will be down to a mere $800 million ($18.50/share), even with an assumed jump in capital spending to $240 million. At Friday's $48.57 per share closing price, Domtar's estimated year-end enterprise value would be a mere $67/share – 65% below the 2007 peak even though the company is in far better shape!
CSFB points out that the nearly $40/share in free cash generation they see over the three year 2009-2011 period equals 80% of the current stock price!Raising target by $10, to $80 — Based on Domtar's strong free cash flows and lower-risk profile, CSFB is raising their one-year target price by $10, to $80.
Domtar has about 6 million tons of North American pulp capacity, about 80% of which is softwood. CSFB believes almost all of the company's pulp capacity is globally competitive since they see no other region in the world is in a position to impact North American softwood pulp producers' competitive position.
Currently, Domtar processes most of its pulp to be sold in the form of uncoated free sheet paper. However, as evidenced by the recently-announced project to convert the Plymouth, NC mill, the company seems to be gradually shifting this pulp production away from the uncoated free sheet business (which is facing secular decline in the US) and into fastgrowing pulps, such as fluff pulp used for absorbency in disposable diapers and feminine care products.
Credit Suisse believes some investors still believe that Domtar is tied forever to a "dying business," -- uncoated free sheet. They do not see uncoated free sheet (office copy paper, envelopes, etc.) as a dying business -- just one that will see modest (2%-3%) annual declines on a secular basis. Firm sees operating rates rising in 2010 and 2011 as cyclical demand forces should counterbalance secular demand these years. In addition, they see Domtar maintaining most of its asset footprint as it may continue, if necessary, to convert more of the "finished products" from its pulp mills into specialty pulps and away from uncoated free sheet paper.
Reiterates Outperform.
Notablecalls: This looks like a fairly significant call from Credit Suisse's Paper Products team. Note their 2010 EPS estimate is now the new Street high and stands (or should I say towers) 62% above consensus.
On the trading dynamics side the stock is down 10pts from its recent highs and is set to report earnings on Feb 4 before market. CSFB is calling for good #'s & is telling people to buy ahead of the release. This shows they have strong conviction in the name. Don't think it goes unnoticed.
The stock is a mover, as evidenced by the ~10% move back in November when J.P. Morgan bumped their rating and estimates.
I do have to note we are in a different kind of market vs. November but I expect the call to attract buyers nonetheless.
It's quite difficult to give a specific range but I suspect that if they get it moving UFS can do $51.50 with $52.50 certainly not out of the question.
nice call!
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