Investors in Transcontinental Inc. have been rewarded for sticking with the company as it transitions more toward packaging and printing and away from print media – although some see now as a good time to take a bit of profit.
Shares of the Montreal-based company are up nearly 20 per cent so far this year amid a steady sell-off of its newspaper assets and an ongoing string of acquisitions in what appears to be the more promising business of packaging for food and consumer products.
The stock hit an all-time, intraday high of $31.95 in early November, the day after it announced it was buying Les Industries Flexipak Inc., a flexible-packaging supplier. It was the company's fifth packaging acquisition since 2014.
The stock has pulled back in recent weeks, though, particularly after the company reported fourth-quarter earnings on Dec. 14 that slightly missed expectations. Revenue of $527.2-million in the quarter missed analyst consensus expectations of about $536-million and compared with $555.6-million last year. Earnings per share came in at 88 cents, while the Street was expecting 90 cents.
The miss snapped a streak of four consecutive quarterly beats from the company, analysts say. Still, some point to its prospects in the packaging industry, the continued reduction in print-media assets, growing free cash flow and attractive dividend (yielding about 3 per cent) as reasons to buy or hold the stock.
"We remain positive on this story and see any weakness that may stem following the quarterly results as representing an opportunity for investors to further add to positions," CIBC World Markets analyst Robert Bek said in a Dec. 14 note. He reiterated his "outperformer" (equivalent to buy) recommendation and $29 price target, which implies a return of about 12 per cent from the stock's current price near $26.
Among seven analysts that cover the stock, three have a "buy" and four a "hold" rating, according to Bloomberg, with an average price target over the next 12 months of $28.29.
Canaccord Genuity analyst Aravinda Galappatthige maintained a "hold" rating and $25 target on the stock after the latest earnings. While the packaging division is expected to stay strong, he expects "secular challenges to emerge" in the core printing business.
He cites the example of La Presse, which will stop printing in January, as well as The Globe and Mail's decision to stop printing in the Maritimes this month. (Transcontinental prints The Globe across Canada). Mr. Galappatthige believes these moves could "accelerate declines in that category."
Transcontinental chief executive officer François Olivier said the company's earnings were weighed down in part by costs associated with the sale of newspapers. (The company sold media assets in Atlantic Canada and the majority of its assets in Québec and Ontario. On Wednesday, Transcontinental said it sold its 50-per-cent stake in CEDROM-SNi Inc., a Montreal-based firm specializing in digital-media monitoring, to CNW Group Ltd.)
The media division will represent about 5 per cent of its overall revenue in 2018, including French-language textbooks, as well as some specialty publications and websites. That's down from 11 per cent this year. Meantime, the company is growing its packaging division, which now represents about 15 per cent of revenue, largely through acquisitions. In 2017, 11 per cent of its revenue will come from its media division and 74 per cent from its printing division.
"Our intention is to grow this [packaging] division into the billions of dollars," Mr. Olivier said in an interview. "One day, we will have more sales in flexible [packaging] than in printing of paper."
The company is focusing its acquisitions on the North American market, with 85 per cent of packaging revenue already in the United States.
Mr. Olivier described it as a fragmented industry with a number of smaller players, which means more potential acquisitions. Still, there's a lot of interest in and competition for the assets, he said, including from much larger, more established companies.
Mario Mainelli, a portfolio manager with Caldwell Investment Management, said the firm has owned the stock for about a year, after previously owning it in 2015.
"It has been a good performer for us," Mr. Mainelli said. "We've been pretty happy with it."
Still, his company recently trimmed its position after the latest earnings report. "We thought it was a good time to take a little bit off the table," he said. "I do still think [Transcontinental is] attractive."