Digital focus a plus for info providers

Fears of a slowing economy and falling advertising revenue have hurt all three of these information providers in the past few months. However, investments in new printing presses and other modern equipment will help keep their costs down. They should also gain from their expanding Internet businesses and lower computing costs.

TORSTAR CORP. $17 (Toronto symbol TS.B; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 78.7 million; Market cap: $1.3 billion; SI Rating: Above average) publishes The Toronto Star, Canada’s largest daily newspaper. It also publishes other daily and community newspapers in Southern Ontario. Newspapers supply 70% of Torstar’s profit and revenue.

The remaining 30% comes from wholly owned subsidiary Harlequin Enterprises Ltd., which is the world’s largest publisher of romance novels.

Torstar has expanded its Internet properties in the past few years, which helps cut its exposure to declining newspaper circulation. As well, the company bought 20% of CTVglobemedia Inc. This business owns the CTV Television Network, specialty TV channels, radio stations and The Globe and Mail newspaper. These assets help broaden Torstar’s geographic exposure.

In 2007, Torstar earned $101.4 million, up 28.2% from $79.1 million in 2006. That’s mainly because restructuring costs in 2007 fell to $7.5 million from $22.3 million. Torstar’s 2007 restructuring should cut its annual costs by $3.7 million. A $13.7 million decline in newsprint costs and a lower tax rate also contributed to the higher earnings. Per-share earnings rose 27.7%, to $1.29 from $1.01.

Income from non-consolidated investments, primarily CTVglobemedia, was $20.4 million in 2007 up from $16.0 million in 2006.

Revenue in 2007 crept up to $1.55 billion from $1.53 billion. Revenue at Torstar’s newspaper division rose 2.6%. That includes the web sites, whose revenue rose 46% in 2007. However, Harlequin’s revenue fell 1.9%. Harlequin makes most of its sales outside of Canada, so the high Canadian dollar hurt its results.

Torstar’s strong results let it cut its long-term debt by 10% in 2007. At $651.0 million, it’s a reasonable 50% of market cap.

The stock is down from the $23.40 it reached in May 2007, mainly due to fears of an economic slowdown in Torstar’s core market of Southern Ontario. It now trades at 14.4 times Torstar’s likely 2008 earnings of $1.18 a share.

However, a new contract with its main union improves Torstar flexibility to reduce costs. The company could also unlock some of its value by spinning off Harlequin as a separate company. Torstar should continue to generate enough cash flow to pay for capital upgrades and maintain its $0.74 dividend, which yields 4.4%.

Torstar is a buy.

THE THOMSON CORP. $36 (Toronto symbol TOC; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 638.9 million; Market cap: $23.0 billion; SI Rating: Above average) provides specialized information to users in the legal, accounting, financial, scientific and healthcare professions.

Over 80% of Thomson’s revenue comes from electronic products, such as software and databases. As well, 80% comes from subscriptions, which gives its predictable revenue streams. In 2007, Thomson earned $1.1 billion before one-time items, up 28.4% from $857 million in 2007 (all amounts except share price and market cap in U.S. dollars). Per-share earnings rose 27.1%, to $1.69 from $1.33. Revenue grew 10.6%, to $7.3 billion from $6.6 billion. If you disregard acquisitions, revenue rose 6%.

Thomson aims to complete its merger with UK-based Reuters Group plc in mid-April. The deal will let Thomson take advantage of Reuters operations to expand sales in Europe and Asia and cut its reliance on North America, which accounts for 83% of its revenue. The company can also market Reuters products to its own customers.

To win approval from competition regulators in Canada, the United States and Europe, Thomson and Reuters have agreed to make certain financial information databases available to competitors.

The merged company will change its name to Thomson Reuters, and will have annual revenue of about $11.4 billion U.S. Its shares will trade in Toronto, New York and London. The Thomson family, which currently owns 70% of Thomson Corp., will control 53% of Thomson Reuters.

Due to timing differences between Thomson’s and Reuters’ dividend payment schedules, shareholders will receive $0.31747 U.S. a share on May 1, 2008, plus $0.22253 U.S. a share in September. Regular quarterly payments of $0.27 U.S. a share will resume in December, for a yield of 3.0%.

Thomson’s stock is down about $10 since the merger announcement in May 2007. That’s mainly due to fears that big write-downs of mortgage-backed securities will prompt banks and other lenders to spend less on information products. However, Thomson has a strong history of successfully cutting costs and savings from the merger should help offset any short-term drop in revenue.

Thomson is a buy.

TRANSCONTINENTAL INC. $15 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 83.7 million; Market cap: $1.3 billion; SI Rating: Average) is a leading provider of direct marketing services, such as direct mail and client database management. This business supplies 45% of its revenue. It also offers commercial printing services (30% of revenue), and publishes over 180 newspapers and 35 magazines (25% of revenue). The United States accounts for 25% of its revenue.

Transcontinental continues to spend heavily upgrading its printing plants, including $80 million in two plants in Montreal. This will give customers more flexibility over colour and printing materials, as well as cut Transcontinental’s operating costs.

These investments are also helping Transcontinental win more outsourcing contracts from publishers. It already has long-term deals to print The Globe and Mail and The New York Times.

For example, it recently won a six-year contract from Rogers Communications worth $210 million. Rogers publishes over 70 magazines, including Chatelaine, Maclean’s, L’actualité, and Canadian Business. To put this contract in context, Transcontinental earned $127.2 million or $1.50 a share before one-time items in the fiscal year ended October 31, 2007, on revenue of $2.3 billion.

The company is taking advantage of the high Canadian dollar to expand in the United States. Transcontinental’s new $228 million printing plant in San Francisco will begin printing the San Francisco Chronicle in 2009 under a 15-year contract potentially worth $2 billion U.S.

Transcontinental is also expanding its Internet businesses as advertisers shift from print to web-based ads. The strong content produced by its print publications helped Transcontinental’s web sites increase their unique monthly visitors by 29% and pages viewed by 46% in 2007.

The company will probably earn $1.39 a share in fiscal 2008, which gives the stock a p/e of just 10.8. The $0.28 dividend yields 1.9%.

Transcontinental is a buy.