Analysis of Transcontinental Inc (TCL.A:TOR)

Transcontinental Inc. is the leading printer in the Canadian market and a major supplier of flexible packaging in North America. The company is also a leader in its print and digital media activities in French and English. Transcontinental has been active since 1976 and has nearly 6,500 employees in Canada and the United States. It has the distinction of having nearly 40% women on its board of directors, including the president, Isabelle Marcoux, a charming forty-something.

Valorization

Transcontinental is trading at an attractive price of 9.36 times recurring earnings, 0.99 times sales and 7.2 times free cash flow. This is a little less good compared to tangible book value since the ratio stands at 3.66. This is nevertheless explained by the significant share of non-tangible assets, in particular goodwill which represents as much as tangible assets. Transcontinental has indeed launched five major acquisitions in the flexible packaging sector since 2014.

The dividend yield is particularly interesting in the current climate, at 3.1%. It also has a significant margin of safety and growth, since the payout ratio is only 29% compared to earnings and 22.4% compared to free cash flow. The company has not hesitated to grow it religiously in the past, at an average annual rate of 11% since 1993. As a picture is worth a thousand words, here is an illustration from the Transcontinental website:

 

Balance sheet & result

Just like the dividend, profits, cash reserves and book value are growing over the long term, which proves the solidity of the business model of this great Quebec company. Transcontinental clearly manages to create value for its owners and this is reflected in the share price which has doubled over the last five years.

Cash reserves are very comfortable, with a current ratio of 2.14 (a sharp increase) and a quick ratio of 1.82. The company therefore has no problem meeting its current financial obligations. The gross margin is down very slightly, but remains very comfortable, at 55.7%. The net margin and free cash flow are not far behind, with 11.3% and 13.7%. Nothing to complain about from a profitability point of view either, since the ROA peaks at 11%, the ROE at 19.4% and the return on cash flow from assets at 15.2%. All that is impressive.

The long-term debt-to-asset ratio is quite high, at 16.3%, but down from the previous year. It should also be noted that total debt is down over the long term and represents only 0.28 times equity. Transcontinental would be able to pay it off in full in just over a year based on 2017 free cash flow.

Another positive point is that the number of shares in circulation is stable over the long term, which is a good point for the shareholder who thus avoids any dilution of his assets.

Conclusion

Transcontinental is a very solid company, operating in a rather defensive sector, which is corroborated by a beta of only 0.64. Its business is simple, fairly sheltered from the risks of technological obsolescence and new competitors, thanks to its leading position. The significant margins it manages to generate also allow it to be quite comfortable with its pricing. Transcontinental is really the kind of stock you can buy and forget about in a corner.

I think the stock is slightly undervalued, around 20%. So I just bought myself a slice of Transcontinental.