Making Money the Old Fashioned Way: On

Here We Go Again: Once again, we are raising our EPS estimates for
Domtar to levels that are almost orders of magnitude above consensus.
Specifically, for 2010, our estimate jumps by 41% to $7.45 from our prior
above-consensus $5.30. Note that consensus for 2010 is “only” $5 per share.

Out Years Up Too: We are also raising our 2011 and 2012 EPS estimates
by $1.30 and $1.15, respectively, to $7.90 and $9.60. At the next cyclical
peak (2013) we now see Domtar earning $12.50, up from $11.35 previously.

Running Out of Debt: Seven months after CEO John Williams expressed a
long-term goal to reduce debt to $1.0 – $1.2 billion, the company has already
arrived. Specifically, Domtar ended the first quarter with net debt of $1.336
billion, however, the company expects “black liquor” tax refunds of $350
million in coming months. Tied. Adjusted for this refund, net debt is already
below $1.0 billion. Also, the company is expected to realize $100 million
from asset sales this year, mainly from the sale of its lumber business.

Upping Target Price by $21 to $105: As a result of our higher EPS
estimates, and – equally – due to the company’s much stronger balance
sheet, we are raising our one-year target price on Domtar to $105. We also
maintain our Outperform rating.

We See Dividend This Year: Based on estimates, Domtar could literally
“run out of net debt” in two years. As such, we believe the company is likely
to institute a least a nominal ($1/share per year) dividend over the next
couple of quarters.

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