transcontinental

Transcontinental has dropped roughly 40% in the past three months, as the turmoil in credit markets has hurt its direct mail operations. Lower advertising spending has also weighed on its publishing business. However, the company is doing a good job controlling costs and expanding its Internet businesses. That should help it cope with the current downturn. 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....

We are always happy to expand the information we provide to you, but only if it improves the ease and value of using our service. For instance, some investors base buy and sell decisions in part on p/e ratios (the ratio of a stock’s price to its per-share earnings). When we provide a p/e, we try to eliminate all one-time items from earnings. These include writedowns, investment gains or restructuring charges. This gives you a clearer, truer view of a company’s profitability. For decades, investors have used p/e’s to spot undervalued stocks. But a low p/e can signal danger rather than a bargain. Or it may point to investor uncertainty, as is the case right now with Transcontinental (see page 16). That’s why you need to look at p/e ratios in context....

As I’ve said several times in the past few weeks, you can only spot a market bottom (a reversal in a falling trend in stock prices) in hindsight. Then too, a market can hit bottom, put on a healthy bounce, then go back down to the bottom once again before going on to a lasting rise. But I do feel that a lot of the risk of further decline is now out of the market. My view is that stocks are likely to move substantially higher in the next 6 months to a year, if not sooner. TERANET INCOME FUND $10.10, Toronto symbol TF.UN, has declined to comment on the new takeover offer of $10.25 a unit from the Ontario Municipal Employees Retirement System (OMERS). The new offer is 6.8% below OMERS’ original offer of $11.00 a unit. OMERS dropped its higher bid mainly due to the slowing Ontario economy and falling real estate values. That could hurt demand for Teranet’s electronic land registry services. Meanwhile, Teranet will pay a cash distribution $0.0225 a unit on November 17, 2008. This partial monthly payment will cover the period from November 1, 2008 to the expiry of the OMERS offer on November 10, 2008....

ARBOR MEMORIAL SERVICES INC. $25 (Toronto symbol ABO.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 10.7 million; Market cap: $267.5 million; SI Rating: Average) owns 41 cemeteries, 27 crematoria, four reception centres located on cemetery premises, and 88 funeral homes in eight provinces. It earned $0.54 a share in its third fiscal quarter ended July 31, 2008, up 35.0% from $0.40 a year earlier. Revenue rose 8.6%, to $62.0 million from $57.1 million. Thanks to the higher earnings, Arbor now plans to pay quarterly dividends of $0.11 a share, up sharply from its old token rate of $0.0175 a share. That pushed up its yield up to 1.8% from just 0.3%. Arbor Memorial Services is a buy....

TRANSCONTINENTAL INC. $13.85, Toronto symbol TCL.A, earned $30.3 million in its third fiscal quarter ended July 31, 2008, up 6.7% from $28.4 million a year earlier. Per-share earnings rose 11.8%, to $0.38 from $0.34 on fewer shares outstanding. These figures exclude unusual items. Revenue rose 6.1%, to $584.9 million from $551.1 million. If you exclude the negative impact of the higher Canadian dollar on Transcontinental’s U.S. and Mexican operations, revenue in the quarter would have grown 8%. Transcontinental’s recent investments in new printing presses should continue to keep its costs low. The company’s expertise and flexibility is also helping it win new printing contracts. For example, it recently started to print flyers for Shoppers Drug Mart in a deal worth $25 million a year. Transcontinental is a buy....

ISHARES DIVIDEND INDEX FUND $20.44 (Toronto symbol XDV; buy or sell through a broker) began trading in December, 2005. The fund currently holds the 30 highest yielding Canadian stocks. These stocks are included in the index based on their dividend growth, yield and average payout ratio. The weight of any one stock in the fund is limited to 10% of the fund’s assets. Its MER is 0.50%. The fund now yields 3.8%. The fund’s top holdings are: CIBC at 7.3%; Manitoba Telecom at 5.6%; National Bank, 5.6%; Bank of Montreal, 5.5%; Russel Metals, 5.3%; TD Bank, 4.7%; Royal Bank, 4.5%; Transcontinental Inc., 4.3%; Bank of Nova Scotia, 4.0%; IGM Financial, 3.8%; and Telus Corp., 3.8%....

MAPLE LEAF FOODS INC. $8.75, Toronto symbol MFI, moved down again this week after it expanded its recall of meat products that may contain listeria bacteria. Maple Leaf has now recalled all of the over 220 products produced at its Toronto plant, instead of the 20 or so that it first identified as possibly containing the bacteria. There is no evidence of listeria contamination at the company’s 22 other facilities, which continue to operate normally. Maple Leaf is working with federal food safety officials to fix the problems at the Toronto plant. It will not re-open the plant until it completes its investigation. The company now estimates the recall will cost it $20 million. To put that in context, Maple Leaf lost $9.4 million or $0.07 a share in the three months ended June 30, 2008 due mostly to restructuring costs. The company also faces several class-action lawsuits....

PRECISION DRILLING TRUST $27.58, Toronto symbol PD.UN, has launched a hostile takeover offer for Grey Wolf Inc. of Houston. Grey Wolf operates 121 drilling rigs in the U.S. Gulf Coast and Midwest regions. Right now, just 17 of Precision’s 240 rigs operate in the U.S. Expanding outside of Canada will give Precision steadier revenue streams, as many of its Canadian customers suspend exploration during the winter. Precision is offering cash and units worth roughly $2 billion U.S. for Grey Wolf. Precision will limit the cash portion to one-third of the total. The price is nearly five times Precision’s 2007 cash flow of $419.7 million (Canadian) or $3.34 a unit. Precision feels its offer is superior to Grey Wolf’s recent agreement to merge with rival Basic Energy Services, Inc. However, Grey Wolf has rejected Precision’s offer and still plans to merge with Basic Energy....

BOMBARDIER INC. $6.32 (Toronto symbol BBD.A) earned $0.26 a share in its fiscal year ended January 31, 2008, up 85.7% from $0.14 in the prior year (all amounts except share price in U.S. dollars). Revenue grew 17.5%, to $17.5 billion from $14.9 billion. Aircraft deliveries rose 10.7% in fiscal 2008, to 361 from 326. Revenue at Bombardier’s train division grew 18.2%, thanks to strong demand for passenger railcars in China and India. Buy. INDIGO BOOKS & MUSIC INC. $13 (Toronto symbol IDG) is doing a good job attracting users to its website with online community groups based on authors and genres. Since their launch in October 2007, these groups now have over 100,000 members. Features like this help build customer loyalty and spur sales. Buy. TRANSCONTINENTAL INC. $18 (Toronto symbol TCL.A) has increased its quarterly dividend 14.3%, from $0.07 a share to $0.08. The new annual rate of $0.32 yields 1.8%. Buy....

TRANSCONTINENTAL INC. $15 (Toronto symbol TCL.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 83.7 million; Market cap: $1.3 billion; SI Rating: Average) is a leading provider of direct marketing services, such as direct mail and client database management. This business supplies 45% of its revenue. It also offers commercial printing services (30% of revenue), and publishes over 180 newspapers and 35 magazines (25% of revenue). The United States accounts for 25% of its revenue. Transcontinental continues to spend heavily upgrading its printing plants, including $80 million in two plants in Montreal. This will give customers more flexibility over colour and printing materials, as well as cut Transcontinental’s operating costs. These investments are also helping Transcontinental win more outsourcing contracts from publishers. It already has long-term deals to print The Globe and Mail and The New York Times....