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Topic: Value Stocks

Big acquisition contributes to this value stock’s re-packaging plan

As printing and publishing yield less revenue, this Canadian stock is making a successful transition to new business.

With its biggest acquisition yet, the company will now get almost half of its revenue from packaging for food makers. In the meantime, it continues to sell off newspapers. While it makes the transition, the shares trade at a low 11 times forecast earnings and yield a solid 2.6%.

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TRANSCONTINENTAL INC. (Toronto symbol TCL.A; is Canada’s leading printer of advertising flyers, magazines, books and newspapers. It also makes plastic food packaging.

In the past few years, the company has cut its reliance on cyclical advertising revenue with acquisitions of firms that produce plastic packaging for food makers. Between 2014 and 2017 (Transcontinental’s fiscal years end October 31), it purchased five packaging firms for a total of $357.6 million.

In July 2018 the company completed the biggest takeover in its 42-year history—its $1.7 billion acquisition of Chicago-based Coveris Americas. That privately held firm makes plastic packaging for consumer and industrial products at 21 plants in the U.S., Canada, the U.K., Ecuador, Guatemala, Mexico, New Zealand and China.

With the Coveris purchase, Transcontinental will now get 48% of its revenue from packaging. That cuts the company’s reliance on its traditional commercial printing operations and advertising flyer distribution.

The addition of Coveris will add $1.3 billion to Transcontinental’s annual revenue. The company also expects to cut $20 million U.S. from its annual costs by the end of the second year.

Transcontinental borrowed $1.1 billion to help finance the purchase. The move increased its long-term debt from $298.4 million as of April 30, 2018, to around $1.4 billion. That’s a high, but manageable, 52% of its $2.7 billion market cap. Transcontinental also sold 10.8 million class A shares for $287.5 million.

Meantime, the company continues to shrink its publishing operations. In April 2017, it sold its newspapers in Atlantic Canada. It also continues to sell off its 93 local and regional newspapers in Ontario and Quebec.

In December 2017, Hearst Communications Inc., which publishes the San Francisco Chronicle newspaper, cancelled its printing contract with Transcontinental. Under the terms of a new deal, Transcontinental will transfer the operations of its printing plant in Fremont, California, to Hearst. However, it will continue to own the facility. Hearst will also rent the plant until the end of 2024, and pay Transcontinental an early termination fee of $42.8 million U.S. This arrangement helped spur revenue gains in the most recent quarter (see below).

Value Stocks: Company’s earnings rise in the most recent quarter

While expanding through acquisitions adds risk, Transcontinental has a strong history of successfully integrating new businesses and making them more profitable. As a result, its overall earnings (excluding unusual items) rose 36.3%, from $148.3 million in 2013 to $202.2 million in 2017. Due to fewer shares outstanding, earnings per share rose at a faster rate of 37.4%, from $1.90 to $2.61.

In its fiscal 2018 second quarter, ended April 30, 2018, Transcontinental’s revenue rose 7.2%, to $534.7 million from $498.7 million a year earlier. The latest figure excludes the Coveris operations as well as deferred payments stemming from its deal to cancel that newspaper printing contract with Hearst Corp. Without those items, revenue declined 5.3%, due to the sale of its newspaper publishing operations in Atlantic Canada and Quebec.

Excluding unusual items, earnings in the quarter rose 6.1%, to $45.1 million from $42.5 million; per-share earnings gained 5.5%, to $0.58 from $0.55, on more shares outstanding.

With the April 2018 payment, the company raised its quarterly dividend by 5.0%. Investors now receive $0.21 a share, instead of $0.20. The new annual rate of $0.84 yields 2.6%. The company’s dividend has now increased by an average of 7.7% annually over the last 5 years.

The stock trades a low 11.1 times the projected fiscal 2018 earnings of $2.83 a share.

Recommendation in The Successful Investor: Transcontinental is a buy.

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