Transcontinental Inc. $21 - Toronto symbol TCL.A

TRANSCONTINENTAL INC. $21 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; 84.5 million; Market cap: $1.8 billion; SI Rating: Average) is the largest commercial printer in Canada, and the sixth-largest in North America. It’s also a leading publisher of community newspapers and magazines, and provides direct marketing services. In August 2007, Transcontinental agreed to pay $103.3 million for PLM Group Ltd., Canada’s fourth-largest commercial printer. PLM’s four facilities near Toronto specialize in direct marketing catalogs and flyers. Demand for direct marketing services like PLM’s is growing strongly, particularly as new “Do Not Call” rules could make it harder to contact potential customers through telemarketing. To put the cost to acquire PLM in perspective, Transcontinental’s earnings in its third fiscal quarter ended July 31, 2007 rose to $0.34 a share (total $28.4 million) from $0.33 a share ($28.3 million) a year earlier. These figures exclude restructuring costs and other one-time items. Revenue grew 3.3%, to $546.5 million from $528.9 million. Transcontinental had just $46.8 million ($0.54 a share) in cash at July 31, so it will have to borrow the cash it needs to buy PLM. That will increase its long-term debt, from 0.4 times equity to about 0.5 times. But PLM is profitable, and the extra cash flow should let Transcontinental steadily pay down the extra debt. The company should earn $1.62 a share in its current fiscal year, and the stock trades at just 13.0 times that figure. The $0.28 dividend yields 1.3%. Transcontinental is a buy.

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