Stock of the week: Transcontinental Inc.Stock of the week: Transcontinental Inc.
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Transcontinental Inc. (TSX-TCL.A, $18.78) is focusing on building its
business. The rising loonie, however, has more than offset this
improvement in its underlying business. All the same, the company is
doing well enough to reward shareholders like you. As a result,
Transcontinental remains a buy for long-term gains and rising
dividends.
In the nine months to July 31, Transcontinental earned $92 million, or
$1.05 a share, excluding one-time items. This was down by 4.5 per cent
from $98.3 million, or $1.10 a share, a year earlier. The lower
earnings are confirmed by a 6.6 per cent decline in the company's cash
flow. Stronger adjusted operating income before amortization at the
Media as well as the Marketing Products and Services divisions failed
to offset significantly lower results in the Printing Products and
Services division.
Transcontinental has taken steps to continue to build its business. In
the third quarter, for instance, it invested $25 million in a modern
high-speed book-printing press system. The company also plans to
invest another $25 million to install a new press and new equipment to
expand its flyer and insert printing plant.
Transcontinental also expanded its business with a few small
acquisitions in the third quarter. Indeed, it bought Canada's largest
publisher of French-language educational resources, such as textbooks.
The company also bought a weekly community newspaper and two
directories that it already publishes each year. More important, it
invested in its Internet-based business. Transcontinental acquired a
recipe website which reaches an audience of a million or so people as
well as a related newsletter with 137,000 subscribers. It also
invested in a partnership with Pecunia, which will help the company
webcast more of its content.
Transcontinental is also winning new business. It signed a multi-year
licensing contract with a U.S. publisher to print a Canadian edition
of More magazine, which has grown quickly by catering to women over
age 40.
Transcontinental also continues to rationalize its operations. In the
third quarter, for instance, it began combining its commercial
printing and direct-marketing facilities in the Greater Toronto Area.
The trouble is, all this progress was more than offset by the rising
loonie. In fact, it reduced Transcontinental's adjusted operating
income before amortization by $15.9 million. That is, the company has
to run even harder just to stay in the same place.
Transcontinental is now working to improve its business on a number of
fronts. It's setting a strategy to offset competitive pressures in
commercial printing. This includes developing its sales efforts and
winning more newspaper outsourcing contracts in the U.S. It also
includes following its strategic investment plan. If the dollar now
stabilizes, the company's earnings should start to recover.
What's more, Transcontinental still earn enough and generates enough
cash to reward you. In the first nine months, it generated cash flow
of $181.4 million. This greatly exceeded net investment in assets of
$97.5 million, the $3 million the company invested in acquisitions and
dividend payments of $16.2 million.
Thanks to this strong cash flow and its sound balance sheet,
Transcontinental has raised its dividend in each of the past five
years. We expect it to continue to do so in the years ahead. And by
September 13, the company had also spent $59.3 million to buy back
more than 3.1 million of its own shares. All else being equal, this
raises your earnings per share. Both measures put the chances of
profiting in your favor.
Transcontinental remains a buy for long-term gains and rising
dividends.
(Click below for a profile of this week's stock.)
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