TORSTAR CORP. $20 (Toronto symbol TS.B; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 78.7 million; Market cap: $1.6 billion; SI Rating: Above average) is a leading Canadian media company. Its main asset is The Toronto Star, the largest daily newspaper in Canada. It also publishes over 160 daily and weekly newspapers in Southern Ontario. Newspapers account for about 70% of Torstar’s total revenue. Torstar’s other main business is wholly owned Harlequin Enterprises Ltd., the world’s largest publisher of romance fiction. Harlequin sells its books in 110 countries. The company’s revenues grew slowly, from $1.42 billion in 2002 to $1.56 billion in 2005, but slipped to $1.53 billion in 2006. Profits fell from $1.62 a share (total $125.3 million) in 2002 to $1.41 a share ($112.7 million) in 2004. Earnings rebounded to $1.52 a share ($118.8 million) in 2005, but restructuring charges cut profit to $1.01 a share ($79.1 million) in 2006. Torstar has built up its Internet operations in the past few years to offset declining newspaper circulation. It now owns some of Canada’s most visited web sites, including thestar.com, toronto.com and LiveDeal.ca. It recently increased its stake in workopolis.com (a popular online job search site), from 40% to 50%. New features such as blogs (online journals devoted to various topics) and live chats help drive traffic to Torstar’s web sites, and increase online ad revenue.
CTVglobemedia offers growth
Torstar’s biggest non-newspaper investment in the past few years was its 2006 purchase of a 20% stake of CTVglobemedia Inc. This business owns the CTV Television Network, The Globe and Mail newspaper and several specialty TV channels. CTVglobemedia later bought CHUM’s radio and TV stations. Torstar paid a total of $337 million for this investment. The connection with such a wide variety of media properties gives Torstar opportunities to promote its web sites and other products. It also reduces its reliance on Southern Ontario. In the second quarter of 2007, Torstar’s earnings rose 15.1%, to $0.38 a share (total $30.1 million) from $0.33 a share ($25.6 million) a year earlier. The most recent earnings figure includes $8.2 million in pre-tax equity earnings from CTVglobemedia. Revenue grew 1.7%, to $397.0 million from $390.3 million. Torstar had to borrow the cash it needed to pay for CTVglobemedia. That pushed up its long-term debt, from 0.4 times equity to 0.8 times, as well as its interest costs. The purchase also increased Torstar’s goodwill to 62% of equity. That’s high, but the strong quality of these new assets reduces the possibility of future writedowns. Harlequin has struggled in the past few years, mainly due to the rising Canadian dollar. It gets most of its revenue from the United States and Europe, so profits from foreign operations translate into fewer Canadian dollars. However, Harlequin’s second quarter profits grew 22.6% thanks to savings from a successful restructuring.
New focus on e-books holds promise
Harlequin now plans to make all of its new titles available as downloadable e-books. This should spur sales to younger readers who prefer to read books on portable computers, mobile phones or special e-book devices. Increasing e-book sales would also cut Harlequin’s paper and distribution costs. Harlequin also plans to launch a new line of non-fiction books, on topics such as health, diet and biographies. Harlequin’s 1,300 authors and wide distribution network should give it an edge in these competitive segments of the publishing industry. We’ve long pointed out that Harlequin is an overlooked asset, and that Torstar could instantly unlock value by spinning it off as a special dividend. Torstar’s community newspaper business is also an under-appreciated asset. Most of the company’s community newspapers operate in smaller cities and towns where they face little competition. That gives them steadier cash flow than Torstar’s bigger newspapers. They also generate extra profits by printing and distributing advertising flyers, and operating regional web sites.
Change could spur ad revenue
The company now aims to spur revenue at The Toronto Star by changing the way it charges for advertising, from per-line rates to prices based on which section of the newspaper the ad appears in. This change should help advertisers reach more potential customers, and encourage them to take out more ads. Torstar’s $0.74 dividend seems safe, and yields 3.7%. The company should earn $1.14 a share in 2007, and the stock trades at 17.5 times that figure. Earnings in 2008 could rise to $1.33 a share, which implies a p/e of just 15.0. Torstar is a buy.
