acquisition strategy

Saputo has nearly tripled for us since we first recommended it in our April, 2003 issue at $11 a share (adjusted for a 2-for-1 stock split in November 2007). We liked its ability to quickly absorb new operations and improve their profits, which offset the risk of its aggressive growth-by-acquisition strategy. Despite its success, the company receives little broker/media attention. That may be because the dairy industry seems dull to many investors. We still like Saputo’s strategy, and its latest purchases should fuel its growth for years to come....

SYMANTEC CORP. $17.07 (Nasdaq symbol SYMC; SI Rating: Average) (1-408-517-8000; www.symantec.com; Shares outstanding: 924.6 million; Market cap: $15.8 billion) is a leading maker of antivirus and Internet security software. Symantec’s best known product is Norton AntiVirus, comprising 30% of revenues. Norton continues to benefit from the growth of the Internet. Increased use of e-mail, the web and mobile devices guarantees continued threats from viruses. In 2005, Symantec expanded its product range when it purchased Veritas Software for $13.5 billion in stock. Veritas is a market leader in data storage, backup and archiving software. In the three months ended December 31, 2006, Symantec’s sales rose 14.3%, to $1.31 billion from $1.15 billion a year earlier (all amounts in U.S. dollars). Ongoing earnings (excluding one-time costs mostly related to the integration of Veritas) fell 12.1%, to $248 million from $282 million, due to weakness in its data center business and higher costs. Ongoing per share earnings were unchanged at $0.26 on fewer shares outstanding....

THE THOMSON CORP. $48 (Toronto symbol TOC; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 640.6 million; Market cap: $30.7 billion; SI Rating: Above average) provides specialized information products and services to over 20 million professionals in the legal, scientific, medical and financial industries. In the past few years, Thomson has sold most of its print operations to focus on electronic data products. That cut its paper and delivery costs, and increased its profits. Thomson now gets over 80% of its revenue from electronic products.

Final step in decade-long shift

Revenue fell from $7.8 billion in 2002 to $7.6 billion in 2003, but rose to $8.7 billion in 2005 (all amounts except share price in U.S. dollars). In October 2006, Thomson unveiled a plan to sell its Learning division, which mainly supplies textbooks to schools. If you disregard this operation, Thomson’s revenue fell to $6.6 billion in 2006....

The food-processing industry seems dull to many investors, but sometimes it creates surprisingly large capital gains. That can happen when a company builds brand names that generate rising sales at premium prices. On the other hand, because consumers tend to stick with brands they know and trust, food processors offer a substantial margin of safety. Here are two leading food processing companies pursuing opposite strategies. Saputo is expanding through acquisitions, mainly of smaller competitors that it can quickly absorb. In contrast, Maple Leaf Foods is consolidating its operations to focus on its more profitable businesses. Still, both approaches should improve their long-term profitability. SAPUTO INC. $39 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 103.2 million; Market cap: $4.0 billion; SI Rating: Average) is Canada’s largest producer of dairy products. Major brands include Saputo, Armstrong, Stella and Dairyland. The company is also the fifth-largest cheese producer in the United States, and the third-largest dairy company in Argentina. Saputo’s Canadian businesses supply 80% of its profit....

SAPUTO INC. $39 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 103.2 million; Market cap: $4.0 billion; SI Rating: Average) is Canada’s largest producer of dairy products. Major brands include Saputo, Armstrong, Stella and Dairyland. The company is also the fifth-largest cheese producer in the United States, and the third-largest dairy company in Argentina. Saputo’s Canadian businesses supply 80% of its profit. Revenue fell from $3.5 billion in 2002 (fiscal years ended March 31) to $3.4 billion in 2003, but climbed steadily to $4.0 billion in 2006. Profits rose from $1.54 a share (total $160.2 million) in 2002 to $2.20 a share ($232.1 million) in 2005. A writedown cut profits in 2006 to $1.82 a share ($192.1 million). Much of Saputo’s recent growth has come from acquisitions. That’s because the North American dairy business is a mature, slow-growing industry, and acquisitions are a faster and at times cheaper way to expand market share than internal growth....

TORSTAR CORP. $21 (Toronto symbol TS.B (old symbol TS.NV.B); Conservative Growth Portfolio, Consumer sector; SI Rating: Above average) is one of Canada’s top media companies. It’s best known as the publisher of The Toronto Star, the largest daily newspaper in Canada. It also publishes over 150 daily and weekly newspapers in Southern Ontario. Newspapers account for roughly two-thirds of the company’s revenue, and around 55% of its profit. The rest comes from wholly owned Harlequin Enterprises Ltd., the world’s largest publisher of romance fiction titles. Torstar’s revenue grew slowly, from $1.42 billion in 2001 to $1.57 billion in 2005. These figures exclude revenue from discontinued businesses. In 2001, the company earned just $0.04 a share (total $3.0 million), mainly due to unusual items. Income in 2002 rose to $1.64 a share (total $125.3 million), but slipped to $1.59 a share ($123.5 million) in 2003. Restructuring costs cut Torstar’s 2004 profit to $1.42 a share ($112.7 million). In 2005, earnings improved to $1.52 a share ($118.8 million)....

Torstar and other top North American newspaper stocks have been poor performers in the past few years. Most are losing classified ad revenue to Internet auction sites like eBay, or free online ad sites like Craigslist. Circulation revenues are also falling, as readers, particularly young people, get more information from TV and the Internet. That makes newspapers a less appealing vehicle for advertisers. We feel some newspaper publishers will survive the current transition period and thrive all the more when good times return. That’s especially true of well-established companies like Torstar that are embracing the Internet and spreading out into related areas. Torstar’s Harlequin subsidiary also gives the stock hidden value. Risk is limited at current levels and the current 3.5% yield eases the pain of waiting for the turnaround. TORSTAR CORP. $21 (Toronto symbol TS.B (old symbol TS.NV.B); Conservative Growth Portfolio, Consumer sector; SI Rating: Above average) is one of Canada’s top media companies. It’s best known as the publisher of The Toronto Star, the largest daily newspaper in Canada. It also publishes over 150 daily and weekly newspapers in Southern Ontario....

TRANSCONTINENTAL INC. $19 (Toronto symbol TCL.SV.A; SI Rating: Average) is the seventh-largest commercial printing firm in North America. It also publishes newspapers and magazines, distributes flyers and other advertising materials, and operates several Internet sites. In the past few years, two-thirds of Transcontinental’s growth has come from its aggressive acquisition strategy. But under a new long-term plan, Transcontinental will probably make fewer acquisitions, and build up its existing operations. For example, Transcontinental plans to offer its printing customers more advisory services and special ad packages, in its publications and online. It hopes to make their ads effective, cut their costs, and generate added revenue....

The Internet has disrupted the historic business model of newspaper publishers and other information providers, competing against them for both readers and ad revenue. Thomson was early among media firms to recognize the change and adapt to it. That’s one reason why it was a favourite of ours in the 1990s (though we switched our advice to ‘hold’ several years ago). Torstar and Transcontinental are broadening their Internet activities. All three stocks have an attractive future, but only two are buys. TRANSCONTINENTAL INC. $19 (Toronto symbol TCL.SV.A; SI Rating: Average) is the seventh-largest commercial printing firm in North America. It also publishes newspapers and magazines, distributes flyers and other advertising materials, and operates several Internet sites....