Torstar Corp. $17 - Toronto symbol TS.B

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.