transcontinental

TRANSCONTINENTAL INC. $16 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 80.8 million; Market cap: $1.3 billion; Price-to-sales ratio: 0.6; Dividend yield: 2.3%; TSINetwork Rating: Average; www.transcontinental.com) is the largest commercial printer in Canada and Mexico, and the fourth-largest in North America. This business provides 65% of its revenue and earnings. The company also publishes newspapers and magazines (30% of revenue and earnings). The remaining 5% comes from its marketing-communications division, which designs advertising campaigns, including direct mail, and analyzes customer-purchasing data.

Less cyclical than it appears

The printing industry is highly cyclical. However, Transcontinental gets over half of its printing revenue through long-term contracts of up to 18 years. The company cuts the cyclical risk of its publishing business by focusing on smaller cities with fewer competing newspapers. About half of the media division’s revenue now comes from local businesses.

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BCE INC., $32.99, Toronto symbol BCE, is buying full control of CTVglobemedia, the private company that owns the CTV Television Network, which consists of 27 TV stations. CTVglobemedia also owns 30 speciality channels, 34 radio stations and The Globe and Mail newspaper. BCE has controlled the CTV television network before: in 2000, the company bought a majority interest in CTV as part of a “convergence” strategy to combine media content with its satellite TV, Internet and phone networks. The plan did not work out as well as BCE had hoped. So, in 2005, BCE sold most of its CTV stake to Woodbridge Co., the Ontario Teachers’ Pension Plan and Torstar Corp. (see below). Right now, BCE owns 15% of CTVglobemedia. It will pay $1.3 billion for the remaining 85%. The company will also assume $1.7 billion of CTVglobemedia’s debt. Following the purchase, BCE will sell 85% of The Globe and Mail to Woodbridge. These deals still need regulatory approval, but BCE expects to complete them in mid-2011....

IMPERIAL OIL LTD. $39 (Toronto symbol IMO; Conservative Growth Portfolio, Resources sector; Shares outstanding: 847.6 million; Market cap: $33.1 billion; Price-to-sales ratio: 1.4; Dividend yield: 1.1%; SI Rating: Average) has formed a new joint venture with parent company ExxonMobil Corp. (New York symbol XOM) and BP plc (New York symbol BP). This new company will explore for oil and natural gas in the Beaufort Sea. Imperial and Exxon will each own a 25% stake in the venture, and BP will own 50%. Underwater exploration in the arctic is hugely expensive, so this joint venture will help all three partners lower their costs. Developing these offshore fields would also help Imperial with its plan to build a new pipeline that would pump gas from the Mackenzie Delta to Alberta. However, exploration will have to wait while regulators review offshore drilling safety standards in the wake of BP’s oil spill in the Gulf of Mexico....

SAPUTO INC., $29.71, Toronto symbol SAP, earned $382.7 million, or $1.83 a share, in the fiscal year ended March 31, 2010. That’s up 37.2% from $278.9 million, or $1.34 a share, in the prior year. The latest earnings matched the consensus estimate. Revenue rose just 0.3% during the year, to $5.81 billion from $5.79 billion. The company raised its cheese prices during the year. However, the higher Canadian dollar hurt the contribution of Saputo’s U.S. dairy operations, which account for 33% of its revenue. Saputo plans to finish consolidating its various southern Ontario warehouses into a single new facility later this year. That should lower its costs by $6.5 million a year, starting in 2011....

ENCANA CORP., $31.37, Toronto symbol ECA, fell 8% this week, mainly because the company announced a plan to double its natural-gas production over five years. This announcement pushed down EnCana’s share price because the weak economy has hurt gas demand and depressed prices. Investors worry that adding to existing natural-gas inventories could push prices down further. However, EnCana’s new drilling and extracting technologies are lowering its production costs. That should give it an advantage over its competitors. The company is particularly interested in producing more gas at its Haynesville shale-gas property in Louisiana. (Shale gas is natural gas that is trapped in rock formations. To extract it, companies must pump water and chemicals into the rock. This fractures the rock and releases the natural gas.)...

CANADIAN TIRE CORP., $52.29, Toronto symbol CTC.A, fell 3% this week after the company reported lower-than-expected 2009 earnings. During the year, Canadian Tire earned $348.0 million, or $4.26 a share. That’s down 12.2% from $396.4 million, or $4.86 a share, in the prior year. These figures exclude several one-time items, including gains and losses on sales of securities by Canadian Tire’s finance division. The company also paid a penalty for redeeming debentures before their expiry date. That will let it take advantage of the improvement in the credit markets to issue new bonds at lower interest rates. Without these one-time items, analysts were expecting Canadian Tire to earn $4.34 a share. Revenue fell 4.8%, to $8.7 billion from $9.1 billion. Overall sales at the company’s main retail division, which consists of its Canadian Tire stores and the PartSource auto-parts chain, fell 2.8%, while same-store sales were 4.2% lower. Weak sales of electronics offset stronger sales of household-cleaning, kitchen and pet-care goods. As well, a lack of snow in Ontario and Quebec hurt sales of winter merchandise, such as snow shovels....

CANADIAN NATIONAL RAILWAY CO. $54 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 471.0 million; Market cap: $25.4 billion; Price-to-sales ratio: 3.3; Dividend yield: 2.0%; SI Rating: Above Average) is spending $100 million to build a new rail hub in Calgary. To put this figure in context, CN earned $1.5 billion, or $3.24 a share, in 2009. When this facility opens in 2013, it will make CN more efficient by speeding up the flow of trains in western Canada. CN Rail is a buy....

BCE INC., $27.51, Toronto symbol BCE, has increased its quarterly dividend by 7.4%, to $0.435 a share from $0.405. The new annual rate of $1.74 yields 6.3%. This is the company’s third dividend hike since a private consortium led by the Ontario Teachers’ Pension Plan dropped its plan to buy BCE a year ago. BCE has also earmarked $500 million for share buybacks. That’s equal to 2.4% of its $20.9-billion market cap. From December 2008 to May 2009, the company spent $986 million to buy back 5% of its shares. Share buybacks increase the value of the remaining shares....

TRANSCONTINENTAL INC. $12 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 80.8 million; Market cap: $969.6 million; Price-to-sales ratio: 0.3; Dividend yield: 2.7%; SI Rating: Average) is the largest commercial printer in Canada, and the sixth-largest in North America. This business provides 60% of its revenue and profit. The company also publishes newspapers and magazines (25% of revenue, 30% of profit). As well, its marketing communications division (15%, 10%) designs direct mail and other advertising campaigns, and analyzes customer-purchasing data. These services help its clients expand sales and build loyalty. The stock fell to $5.42 last March. That’s because the recession hurt the company’s direct-mail volumes. As well, many of its clients are U.S.-based financial institutions. Higher credit losses prompted many of these customers to cut their advertising spending. Transcontinental has cut its costs in response. This involved closing a direct-mail plant in Pennsylvania and merging some printing plants. So far, these moves have lowered its costs by $50 million a year. It should achieve its goal of $100 million in annual savings sometime next year....

The credit crisis and recession weighed heavily on these three information providers. They have also been hurt by competition from free information on the Internet. All three have cut their costs in response. That puts them in a good position to increase their earnings as the economy rebounds and advertising revenues grow again. As well, all are leaders in their niche industries and regions. That gives them an advantage over their competitors. We continue to see all three companies as buys for long-term gains....