TORSTAR CORP. $8.01 (Toronto symbol TS.B; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 79.7 million; Market cap: $638.4 million; Price-to-sales ratio: 0.4; Dividend yield: 6.6%; TSINetwork Rating: Above Average; www.torstar.com) publishes The Toronto Star, Canada’s largest daily newspaper by circulation. It also publishes three other daily papers and over 110 weeklies, mainly in Southern Ontario. The company also owns a hidden asset in Harlequin Enterprises Ltd., the world’s leading romance novel publisher.
Ad revenue from Torstar’s newspapers is shrinking faster than we thought. As well, revenue from its web sites has so far failed to make up the difference. Strong competition and unfavourable foreign exchange rates are also hurting profits at Harlequin. As a result, Torstar’s earnings fell 44.0% in the three months ended September 30, 2012, to $14.1 million, or $0.18 a share, from $25.2 million, or $0.32 a share, a year earlier.
The company continues to cut costs by laying off workers and selling surplus real estate. These moves should save it $5.2 million in the fourth quarter of 2012 and an additional $9.5 million in 2013. If you exclude severance costs and other one-time items, Torstar’s earnings per share would have fallen 21.6%, to $0.29 from $0.37.
Overall revenue fell 6.2%, to $355.3 million from $378.7 million. Revenue at the media division (which provides 70% of the company’s total revenue) fell 3.4%. However, cost cuts at this business put it in a strong position to increase its earnings as the economy expands. The company also plans to start charging users to access The Toronto Star’s website, which should help boost its revenue.
Harlequin’s revenue declined 6.8% in the quarter. However, the growing popularity of e-books is making it easier for Harlequin to increase its sales, particularly in overseas markets, without the traditional burden of printing and distribution costs. E-books accounted for 20.3% of Harlequin’s sales in the quarter, up from 15.8% a year earlier.
The stock trades at a low 5.4 times the $1.48 a share that Torstar should earn in 2012. The $0.525 dividend still seems safe, and yields 6.6%.
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