TRANSCONTINENTAL INC. $14 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 78.0 million; Market cap: $1.1 billion; Price-to-sales ratio: 0.5; Dividend yield: 4.1%; TSINetwork Rating: Average; www. tctranscontinental.com) is Canada’s leading printer of flyers, magazines, newspapers and books. This business accounts for 67% of its revenue and 85% of its earnings. The remaining 33% of revenue and 15% of earnings comes from publishing 35 magazines and 175 daily and weekly newspapers.
Advertisers continue to shift to the Internet. That’s why Transcontinental’s revenue fell from $2.2 billion in 2009 to $2.0 billion in 2011 (fiscal years end October 31). In 2012, the company traded its Mexican printing plants for six Canadian facilities. The new plants brought its revenue up to $2.1 billion in both 2012 and 2013.
Printing plant swap spurs earnings
Transcontinental’s earnings rose 17.0%, from $1.65 a share (or a total of $133.5 million) in 2009 to $1.93 a share (or $155.9 million) in 2010. They then fell to $1.85 a share (or $149.4 million) in 2011. However, earnings rebounded to $2.02 a share (or $157.2 million) in 2013, as the company began saving $40 million annually from merging the six new plants with its existing operations.
Meanwhile, recent printing press upgrades have helped Transcontinental win new clients, including The Globe and Mail and San Francisco Chronicle daily newspapers. More than 60% of the company’s revenue now comes from printing contracts up to 18 years long.
The company cuts its media operations’ cyclical risk by focusing on newspapers in smaller communities with little competition. It is also expanding its online business: Transcontinental now owns or sells ads on over 3,500 websites.
Sun papers look like a nice fit
Transcontinental is taking advantage of the slow economy to add to its media properties. It recently agreed to pay $75 million for 74 community newspapers in Quebec, along with their websites. The seller is Sun Media, a subsidiary of Quebecor (Toronto symbol QBR.B).
As part of the deal, the company will also print some of Quebecor’s magazines and direct marketing materials. Transcontinental expects the new operations to add $20 million a year to its gross operating income. Competition regulators must approve the deal, but the company expects to complete it in mid-2014.
Transcontinental’s sound balance sheet will let it keep expanding. Its long-term debt of $128.9 million is a low 12% of its market cap. It also holds cash of $30.3 million, or $0.39 a share.
High dividend yield adds appeal
Recently signed printing contracts should add over $40 million a year to Transcontinental’s revenue, starting in fiscal 2014. That should push up its earnings to $2.05 a share this year. The stock trades at just 6.8 times that estimate. The $0.58 dividend seems safe and yields 4.1%.
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