It is called the last mile, and it’s crucial to the future of all commerce. Yet most investors...
This Paper Tiger Could Yet Roar
06/22/2012 11:45 am EST
Concerns over future of print have hammered this printer’s stock. Bargain hunters, pay attention, writes John Heinzl, reporter and columnist for Globe Investor.
Transcontinental (Toronto: TCL.A) would appear to have plenty of things going for it. It spins off lots of cash, has a solid balance sheet, and regularly raises its dividend.
What’s more, the company recently closed an acquisition that cemented its status as Canada’s largest commercial printer, and it also locked up more than $1.5 billion of multi-year deals with Canadian retailers, whose flyers are a mainstay of its business.
So you’d think Transcontinental’s stock would be climbing, right? Nope, it’s getting clobbered—to the point that some analysts say it’s a bargain.
In the past three months, shares of the Montreal-based printer and publisher have plunged about 26%, hitting lows not seen since the financial crisis of 2008-2009. The sinking stock price, combined with a dividend increase in March, has pushed Transcontinental’s yield up to 6%—a level that underlines investors’ growing concern.
Certainly, Transcontinental is facing some challenges. Its media division—which publishes a dozen daily newspapers, 90 community weeklies, and about 30 magazines ranging from Canadian Living to The Hockey News—is grappling with a sluggish advertising market and a shift of ad spending to the Internet.
The company has captured some of those migrating ad dollars with its own stable of 300 Web sites, but growth of online spending has recently slowed.
Underscoring the rough ad market, Transcontinental took a $180 million writedown on its community newspapers and magazines in its second-quarter results announced on June 7. Including the charge, the company posted a loss of $106.2 million, or $1.31 a share.
In its larger commercial printing operations, the company churns out 5 billion flyers annually, and also prints hundreds of Canadian and US magazines, catalogues, brochures, annual reports, direct marketing materials, and newspapers (including The Globe and Mail) for clients.
As dominant as the company is, its reliance on the printed word is scaring off some investors, which explains the slide in the share price. With more advertisers and readers moving online, and casualties such as Yellow Media serving as a reminder of how vulnerable print publishers can be, there’s little appetite for a stock that is so heavily exposed to the world of paper and ink.
"We see no rush to buy this stock," TD Securities analyst Scott Cuthbertson said in a note. "While arguably inexpensive, the valuation here is not significantly different [from other printing companies] and visibility remains poor."
But other analysts say the doom and gloom is overdone in Transcontinental’s case, given the varied niches it serves and its solid financial condition.
Trading at just 3.6 times estimated 2013 free cash flow of $2.66 a share, Transcontinental "is priced by the market...as if it is in dire straits," said Canaccord Genuity analyst Aravinda Galappatthige in a recent note. "Yet, its balance sheet is steady with relatively low debt, and we are not seeing any meaningful erosion in the top line."
CIBC World Markets analyst Robert Bek agreed that Transcontinental’s "shares remain too cheap" given its free cash flow. "It is hard to see shares get squeezed any further at current levels."
While it’s difficult to predict where the printing business will be a decade from now, for the next few years, at least, things are looking up for Transcontinental, analysts say.
In a deal that closed in March, the company acquired the Canadian assets of US-based Quad/Graphics, beefing up the printing side of its business. The deal, which culminated with about 500 layoffs and the closing of two of the six acquired plants, is expected to add about $230 million in revenue and generate cost savings of about $40 million.
In another positive for the printing segment, the $1.5 billion in recent contract renewals and extensions with major retailers—including some Quad/Graphics customers—means that more than 70%, or about $600 million, of Transcontinental’s print retail business is under contract for at least three years.
For investors, yet another plus is that Transcontinental has put a period of heavy capital expenditures behind it and is now seeing strong growth in cash flow—money it can use pay dividends, reduce debt, and as it hinted during the second-quarter conference call, buy back stock.
In April, the company announced a normal course issuer bid to purchase up to 5% of its outstanding shares, but it didn’t use the program immediately. That could soon change, however.
"If the stock price continues to trade at recent price levels, we will use the program to provide a return to our shareholders through earnings accretion," chief financial officer Nelson Gentiletti said on the conference call.
Translation: Transcontinental thinks its stock is cheap, too.
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