Investors in Transcontinental Inc. are hoping the company's diversification into food packaging will help boost profits given the bleak industry outlook for its core businesses – printing and publishing newspapers and magazines.
Shares of the Montreal-based company have been lacklustre over the past year as the company cuts costs and tries to drive revenue through acquisitions and new printing and distribution agreements.
Investors that are sticking it out in the volatile printing and media sector believe the stock is cheap and attracted by Transcontinental's healthy dividend, yielding about 4.5 per cent.
They're also betting the company's purchase of Capri Packaging earlier this year, which makes bags and lids for dairy products, will bring a new source of revenue.
Analysts say the new direction is needed as the print media market continues to suffer from weak advertising revenue and a change in readership habits toward digital publications.
"We are encouraged by the company's efforts to diversify the business away from the print category towards a more stable sector," Canaccord Genuity analyst Aravinda Galappatthige said in a recent note.
He's one of six analysts with a "hold" or equivalent rating on Transcontinental, while one says "buy" and one "sell," according to Bloomberg. The analyst consensus price target over the next year is $15.25. That leaves some room for improvement from where the stock is currently trading around $14.50.
However, that's still below the stock's 52-week high of $17.19 in mid-November last year – its highest point since early 2011.
The shares have bounced between about $13.50 and $16.50 so far this year as the company tries to navigate strong headwinds in the print business and incorporates its Capri acquisition, which closed in May.
National Bank Financial analyst Adam Shine has a "sector perform" (equivalent to "hold") and $15.50 target, expecting the packaging business to help improve margins, while cost cuts in the media division will help ease the pain of weak advertising spending.
Transcontinental said last month it was closing 20 weekly newspapers in Quebec and selling 14 others as part of a reorganization from its acquisition of Sun Media Corp.'s weekly newspaper portfolio in that province late last year.
It has also recently signed printing agreements with Postmedia Network publications such as The Vancouver Sun and the Montreal Gazette. (Transcontinental also has a long-term deal to print The Globe and Mail in most of its major markets in Canada.)
About two-thirds of Transcontinental's revenue comes from its print and packaging business, and the rest from its media division including magazines such as Elle Canada and The Hockey News.
BMO Nesbitt Burns analyst Tim Casey has a "market perform" rating on the stock (also equivalent to a "hold"), and a $15 price target, seeing long-term challenges in both the print and media divisions.
He said the print division is plagued with overcapacity and weak pricing, including the flyer business as more grocers are turning to digital coupons and loyalty reward programs.
"Printing continues to face declining volume in direct marketing and magazines, while media remains challenging due to a soft print advertising market," Mr. Casey said in a recent note.
Bruce Campbell, president and portfolio manager of Campbell Lee & Ross, doesn't own Transcontinental, citing the declining printed flyer business. While the stock is cheap, he said the "risk/reward isn't that great as it will never get a high [price-earnings] multiple, in my opinion."
Peter Hodson, CEO of independent firm 5i Research, calls Transcontinental a "classic value play" trading at about six times next year's earnings.
"We think it's worth buying for the right type of investor. Anyone looking for growth should stay away from it," he said.
RBC Dominion Securities analyst Haran Posner said the company is a preferred name among printers and publishers, but he has a "sector perform" and $16 target, calling the stock "reasonably balanced," in a recent note.