Transcontinental: Value trap or golden opportunity?

Transcontinental Stock

Transcontinental is Canada’s largest printer, and more recently (due to some major acquisitions) quickly becoming a leader in the packaging industry as well.  Over the last few years Transcontinental has deployed around 2 Billion dollars to acquire packaging companies such as Coveris & Trilex.

It’s been a wild ride for Transcontinental the last couple of years, as they have slowly been transforming their business from printing and speciality media to packaging.  Although Transcontinental may not be a household name, make no mistake, it is a massive company with a global footprint.  With over 9000 employees, and almost 3 Billion dollars in revenue in 2018.

The stock price has taken a beating.  Just over a year ago Transcontinental was trading over $30, today you can pick up shares for around $15. So what happened?

The printing industry continues to decline.  In 2016 the printing segment was responsible for 74% of Transcontinental revenue.  Fast forward to today, and printing revenue is responsible for just over 40% of their revenue.  That sounds bad, and most people (even analysts) still look at Transcontinental as a printing company with declining revenue.  What most analysts miss, and what they aren’t talking about, is that over the same time that printing revenue has fallen, their packaging revenue has skyrocketed.  In 2016 packaging was responsible for 11% of revenues – today packaging makes up 53% of revenues.

Transcontinental Revenue By Sector

*Above image courtesy of TCL investor presentation(page 8)

The market is still valuing this as a printing company that is struggling.   Yes, printing revenue has dropped – BUT- overall revenue has actually increased, so has EBITDA and earnings per share has been steady.  It’s not all gravy though, pretty much all of their revenue growth is coming via acquisitions (which isn’t cheap).  From 2009-2017 Transcontinental did a great job of deleveraging their balance sheet.  They managed to bring their net indebtedness ratio from 2.6x to 0.3x, all while growing revenues, increasing dividends, doing share buybacks and seeing the share price appreciate.  Unfortunately, to complete the transformation from printing to packaging, they had to take on a lot of debt (billions) for multiple acquisitions.  In 2018, their net indebtedness ratio was back up to 3.1x, but has already fallen to 2.7x.  Here is a quick view of Transcontinental’s net indebtedness ratio over the last decade.

Transcontinental Net Indebtedness Ratio

The big question is will they be as successful over the next 10 years, as they were in the previous decade getting that ratio down.

Transcontinental Stock Metrics

Price/Earnings:  As I mentioned, the stock is (and has been for a while) valued at a pretty low multiple  I believe this is because most people still aren’t convinced Transcontinental will be able to dominate the packaging space like they did the printing space. At the time of writing this, Transcontinental is trading at 8.9x earnings and just 6x forward earnings.  The company also believes the shares are undervalued.  In 2018 they repurchased over 500,000 shares.  So far in 2019 they haven’t repurchased any, although I believe that is because their top priority right now is debt repayment.

Dividend: Transcontinental has a long history of raising it’s dividend. It continues to raise its dividend each year, and currently pays a rather succulent 5.74% yield.  The payout ratio is creeping up, although still easily covered by cash flows.  Although they seem to keep raising the dividend each year, personally I’d prefer they used the money to pay down debt and buy back shares when they are valued this low.

Transcontinental: The Bottom Line

The big question is, will they be able to rebound, pay off their debt, start seeing significant gains from their recent acquisitions, and turn this company into one of the top packaging companies in North America?  I’m not a fortune teller, honestly I don’t know.  That said, I believe they are on the right track, and I’m betting on a turnaround.

In just 4 years they have grown the packaging business(via acquisitions) from 2 plants and under 50 million in revenue, to 28 plants and over 1.5 billion in revenue.

Transcontinental Stock Packaging Revenue

Although things haven’t been silky smooth, there was bound to be a learning curve, and I believe once they get everything sorted out, we will start to see a big turnaround. It may be a rocky ride for another year or two, but I believe if you are patient there will be big value to be found a decade from now.  The key will be paying down debt, and continuing to increase efficiencies in both the printing and packaging industries.  As a shareholder, I hope they wait to increase the dividend, and instead put the money to work paying off the debt faster, and continue share buybacks while the price is still sub $20.

Would you take a chance on Transcontinental? Let me know in the comments.

*Disclaimer* I do own shares ofTranscontinental, and amlong $TCL.