Transcontinental Inc. $22 - Toronto symbol TCL.A

TRANSCONTINENTAL INC. $22 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 85.8 million; Market cap: $1.9 billion; SI Rating: Average) is the largest commercial printing firm in Canada, and the sixth largest in North America. The company gets about half of its revenue from its marketing division, which prints catalogues, flyers and other advertising materials. Transcontinental also helps its advertisers develop strategies, and analyze customer data for trends. Other types of printing, such as newspapers, books and magazines, accounts for 30% of its revenue. The remaining 20% of revenue comes from its media division. Transcontinental publishes over 150 local and weekly newspapers in Atlantic Canada, Quebec, Ontario and Saskatchewan, as well as over 40 consumer interest magazines, including Canadian Living and The Hockey News. Transcontinental’s revenue grew at an annual compound rate of 5.1%, from $1.8 billion in 2002 (fiscal years end October 31) to $2.2 billion in 2006. Profits before unusual items rose from $1.46 a share (total $123.7 million) in 2002 to $1.71 a share ($151.5 million) in 2004. Transcontinental has spent $269 million in the past two years on new plants and press equipment that will speed up the printing process and cut operating costs. This spending cut its profits to $1.60 a share ($142.8 million) in 2005, and to $1.54 a share ($134.3 million) in 2006. Thanks to acquisitions in the past few years, Transcontinental now gets 30% of its revenue from the United States and Mexico. Although the company uses hedging contracts to cut its currency risk, the recent rise in the Canadian dollar has also hurt its earnings growth. Modern facilities are helping Transcontinental win new contracts, including long-term deals to print The Globe and Mail and The New York Times. Transcontinental’s biggest outsourcing contract so far is a 15-year deal to print The San Francisco Chronicle daily newspaper and its related products. The company will spend about $228 million to build a new printing plant in San Francisco, which should begin operations in 2009. The deal should generate revenue of $2 billion U.S. for Transcontinental over the 15 years. The contract lets the company pass along higher paper prices, which cuts its risk. The company is also expanding its direct marketing operations. Many companies are turning to direct marketing firms to target certain customers, develop advertising campaigns and improve sales. Another Transcontinental innovation is its unique door-to-door distribution service, which delivers plastic bags filled with flyers, product samples and coupons to over 12 million Canadian households each week. This service makes it easier for advertisers to target customers based on age, geographic location, household income and other criteria. The stock got as high as $28 in 2004, but it fell below $18 in 2006 due to weaker earnings. It now trades at just 13.6 times the $1.62 a share it will probably earn in 2007. In light of the stock’s recent rise, the company will probably use any excess cash flow to increase its $0.28 dividend (1.3% yield) instead of buying back shares. Transcontinental is a buy.