Transcontinental Inc. $8.50 - Toronto symbol TCL.A

TRANSCONTINENTAL INC. $8.50 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 80.8 million; Market cap: $686.8 million; Price-to-sales ratio: 0.3; SI Rating: Average) now trades at just 5.1 times its forward earnings estimate of $1.66 a share. That’s mainly because advertisers are shifting away from traditional direct mail services to the Internet. Direct marketing accounts for 50% of Transcontinental’s revenue, and 40% of its profit. Transcontinental is also a major commercial printer (25% of revenue, 30% of profit). Many of its major customers, such as newspaper publishers, are now stagnating as the slowing economy hurts their circulation sales and advertising revenues. The slowdown is also putting pressure on Transcontinental’s own publishing operations, which consists of 42 magazines and 172 newspapers, primarily in eastern Canada (25% of revenue, 30% of profit). Despite its current problems, we feel Transcontinental still has appeal. The company’s recent investments in new printing presses should continue to help it keep costs low. Transcontinental is also expanding its own portfolio of web sites, and shifting the focus of its marketing business away from direct mail to online campaigns. The company now plans to close a direct mail plant in Pennsylvania, and transfer its operations to another plant about 100 kilometres away. The closure will cost it up to $35 million, but should save it $11 million a year. The company also wrote down the value of its direct mail business in the U.S. by $195 million. This was a non-cash accounting adjustment that had no impact on Transcontinental’s cash holdings of $90.7 million or $1.12 a share. If you disregard all unusual items, earnings in the fiscal year ended October 31, 2008 rose 11.3%, to $141.6 million from $127.2 million in the prior year. Earnings per share rose 15.3%, to $1.73 from $1.50, on fewer shares outstanding. Revenue grew 4.4%, to $2.4 billion from $2.3 billion. The U.S. and Mexico account for 16% of Transcontinental’s revenue. If you exclude unfavourable foreign exchange rates, revenue would have grown 6.5%. Transcontinental’s $0.32 dividend seems secure, and yields 3.8%. As well, long-term debt of $602.1 million is a reasonable two years’ cash flow. Transcontinental is a buy.