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Torstar downgraded to 'underperform' by Scotia Capital

The tail is wagging the dog at Torstar Corp. , and that's barking up the wrong tree for Scotia Capital analyst Paul Steep.

Mr. Steep downgraded Torstar's stock to "underperform" from "sector perform" and lowered his profit forecasts, after the publishing company reported lower-than-expected third-quarter earnings and revenues.

The company is showing stronger-than-expected growth in its Harlequin romance-book-publishing division (evidence, perhaps, of just how popular escapism becomes during recessions), but its bread-and-butter newspaper publishing business is in quicksand.

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Newspaper and digital revenues in the third quarter were down 11 per cent from the second quarter and 13 per cent from a year earlier; EBITDA was down a massive 40 per cent from the second quarter and 33 per cent from a year ago.

The print-advertising slump is hammering the newspaper and digital operations, which include the Toronto Star - our crosstown rival, which this week announced plans to reduce staff and outsource some editorial functions.

"In the near term, we anticipate that advertising headwinds within newspaper and digital are likely to persist, while Harlequin should deliver modest growth," Mr. Steep wrote in a report Thursday.

He noted that Torstar is in talks with lenders to extend its $310-million revolving credit facility for another year, and he expects the company to face a higher interest rate on the renewal. He added that the company may also face a goodwill writedown in the fourth quarter, when it conducts its annual impairment test on its investment in CTVglobemedia (which owns, among other assets, The Globe and Mail).

Not everyone is as down on Torstar as Mr. Steep, though. Drew McReynolds, an analyst at RBC Dominion Securities, raised his price target on Torstar's stock to $9 from $8.50, citing the improving profit margins at Harlequin. (He maintained his "sector perform" rating.)

With Harlequin representing only about one-third of Torstar's revenues, though, it's not the part of the company that you want to see driving the results. The newspaper and digital operations can only get so far through cost-cutting; the question is whether a recovery in the housing and labour markets will bring with it a rebound in job and real estate ads that the Toronto Star so desperately needs.

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