Tuesday, July 15, 2008 2 comments ++[ CLICK TO COMMENT ]++

Preliminary Look At Torstar (TS.B) [Part I]

I'm really intrigued by the idea of investing in a "newspaper" company. I hope this isn't my next great shooting-for-the-stars idea that's going to end up in flames. I have been reading up on the industry, as well as comparing some companies, and they look interesting. First thing to keep in mind, though, is that they are risky (especially if you don't know what you are doing like me.) You will certainly be going against the Street consensus which is that newspapers are in a long-term secular decline. It's not easy to argue against that, if you focus on the printed news side of things.

Based on my read of history, newspapers have faced some industry-altering events in the past. The last big crisis faced by the newspaper industry was probably the rise of television news. The thinking back then was that television news was going to seriously damage printed news and possibly make it obsolete. It hurt the industry but not to the degree some anticipated. However, the present threat of the "free" Internet is a far greater challenge.

Most newspaper companies that I'm interested in are involved in multiple activities so you can't necessarily compare them directly. Washington Post (WPO), for example, generates something like half its revenue from an education-related business. In contrast, some company like Torstar (TSX: TS.B) generates about 25% to 30% of its sales from (women's) books. One of the readers mentioned Pearson (PSO), which owns the Financial Times, and generates about 80% from books (primarily education). So these companies are quite different from each other and you need to understand what you are investing in. I have narrowed down my decision to Torstar (but I may change my mind to another, such as New York Times, if the situation changes.)

Here is my first look at Torstar...

Business Mix

Torstar is involved in several different businesses as shown below:

Torstar dominates the newspaper landscape in Ontario, Canada's most populous province. On top of owning 100+ community newspapers (most of these are weeklies), it owns the flagship Toronto Star, the most popular newspaper in Canada. Its other big business is Harlequin, which is famous for publishing women's romance novels.

Torstar has a 19.35% stake in Black Press, which publishes newspapers in Western Canada and in some parts of the US. Given that economic growth has been strong in the west (mostly due to booming commodites), the Western papers should do better. However, the long-term future is up in the air. I think the big-name newspaper properties may be able to capture a critical mass on the Internet but I'm not sure about the smaller papers.

A big investment is Torstar's 20% stake in CTVglobemedia, which is a leading media company in Canada with some key television channels, radio stations, and a leading national newspaper, The Globe & Mail.

The following charts (from June 24, 2008 Torstar presentation) describe the revenue and EBITDA breakdown:

It generates about 70% of revenue from newspapers and about 30% from books. Its Internet revenue is very small (less than 5% depending on how you break it down). Torstar also has additional strategic investments in internet sites/television/radio/etc, which contribute about 20% of earnings.

Long-term Problems

The main problem plaguing Torstar is the general decline in newspaper readership and advertising revenue. Less people are reading newspapers (particularly true for people under 30) and businesses aren't advertising in the paper as much either. Canadian newspaper readership has been declining around 3.1% per year (CAGR, compound annual growth rate) over the last 8 years. On top of that, highly profitable segments in a newspaper like classifieds have moved online (ebay, craigslist, etc).

Harlequin, its book publishing arm, has had problems over the years due to the strong appreciation of the C$ against the US$--but this has come to an end for hte most part IMO. It is a slow growth business with its own set of threats from Internet digital books sales, to difficulty with direct mail campaigns (it used to rely heavily on this it seems.)

The Internet properties generally do not generate much revenue right now and are a drag (some of them are fine but most are not). Although it is necessary to build out the Internet business, the fruits, if any, will be long time coming. As I will mention in a future post when I detail my thinking regarding the Interent properties, some of the properties seem to have a good possibility of dominating certain sectors in the future. In particular, workopolis.com, 50% of which Torstar owns, already seems to be the #1 job search site in Canada. Although job sites come and go, anyone that can stake a strong claim now can possibly develop a large moat in the future. Although somewhat of a long shot right now, I also think wheels.ca and toronto.com have potential to develop their brand and capture a life-time customer. Those sites likely need more work but they have a good shot.

Similar to, say, auto manufacturers, one of the difficulties for newspapers is that they have high fixed costs (printing presses, bulk paper orders, distribution network, etc.) The publishing system, throughout time, has been optimized to maximize units sold (just like car companies.) As sales decline, it is very difficult to cut costs. Paper costs go down and labour may decrease slightly (most are unions and hard to lay off workers--labour really isn't an issue though), but the cost of the printing presses, energy used in factories, and so forth, stay the same. Having said that, if they can successfully transition to the Internet (or some digital media distribution system,) their costs will drop significantly.

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2 Response to Preliminary Look At Torstar (TS.B) [Part I]

July 17, 2008 at 10:57 AM

Just a couple of points about your post. Metroland is actually a division that provides the highest growth in terms of revenue for Torstar. Most of their papers are printed twice or three times a week there are only couple of weeklies in Toronto. The thing about Metroland though that almost no money is made on the paper itself, but rather the money is made of flyer distribution. Paper is just a jacket for a flyer. With their new initiatives like flyerland.ca and Workopolis making a contract with Rogers media to create 29 niche recreuitment websites - you do see them going into online direction.

July 17, 2008 at 1:13 PM

Thanks for that insight Roman. What are your thoughts on pricing for flyers? Do you see that coming under threat from other sources (online, e-mail direct mail, etc)?

You are right in saying that Metroland seems to be doing well but I'm not too confident with that. They might be isolate somewhat from the problems plaguing the big city papers and might be slightly behind. If you look at the US newspaper companies with rural focus (I don't know what's a good example but maybe LEE or GCI) they are struggling. So I think any future growth has to come from, as you pointed out, properties like Workopolis.

Thanks for your comments...

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