Hold on a second. (Takes a deep breath)
Yes, I’m laughing at this Rob Ford crack scandal.
A little back story, for those of you who haven’t heard of this story. Back in May,website Gawker published a story where they claimed to have viewed a video showing Toronto’s mayor Rob Ford smoking crack cocaine. They started a crowdfunding campaign to raise the $200k needed to buy the video from the original source. The money was eventually raised, but the owner of the tape never reappeared to collect.
Rumors circulated about the mayor’s drug and alcohol use for months, finally culminating just a few days ago, as Toronto Police confirmed they had obtained a copy of the tape. Ford admitted on Tuesday he had, indeed, smoked crack cocaine on at least one occassion in the past, while under the influence of alcohol.
Now, as I type this, a new video has emerged, of a visibly agitated Rob Ford threatening to kill an unknown person, hosted on the Toronto Star’s website. (Warning, that link contains strong language. But is also hilariously crazy.)
While this is an entertaining story, is there a way for investors to make money off it? If there is, the obvious choice is Torstar Media, (TS.B) parent company of The Toronto Star, Canada’s largest daily newspaper.
Torstar’s main business is the Toronto Star, along with a book publishing division, which primarily produces romance novels under the Harlequin banner, which produces more than 100 titles a month in 34 different languages. The media business is responsible for approximately 70% of the total company’s revenue, with the publishing division picking up the other 30%.
Torstar released quarterly results on Nov. 6th. If you exclude the $85M of write-offs in the quarter, the company made 18 cents per share (compared to an 89 cent loss including the write-offs). This is Torstar’s first quarterly loss since 2009. So much for the struggling newspaper business.
Torstar has been steadily paying down debt since 2009, dropping long term debt from $552M at the end of 2009 to $194M today. The company’s long term debt consists of bankers’ acceptance loans spread out approximately evenly between Canadian and American dollars, which come due in 2015 and 2017, respectively. They easily have enough cash flow to cover the interest, and shouldn’t have to worry about lenders calling the debt.
The company shares trade at $5.77 as I write this, a far cry from company’s book value, $9.42. Yes, a great deal of that book value is made up of goodwill, but the company’s history of generating earnings makes this a bit of a moot point. Let’s look at earnings over the past 4 years, including the first 9 months of 2013.
2010 – $2.64
2011 – $2.72
2012 – $1.29
2013 – ($0.40)*
*Or a profit of $0.68 if you exclude the write-downs from this last quarter.
There are concerns, the main one being Torstar’s revenue slowly declining. For the first three quarters of 2013, the company’s revenue has fallen 4%, matching the decline from 2011 to 2012. Torstar has been pushing into various online assets, including a stake in Workopolis, Canada’s largest job search website, but this hasn’t been enough to stop a slow revenue decrease. The company introduced a paywall back in August, charging people $9.99 per month for unlimited access to the Toronto Star’s website. This should help increase revenue, but at the expense of taking some eyeballs away from the site.
The stock also pays a large dividend, over 9% annually. At this point the company easily makes enough to cover it, but continued revenue weakness may cause the company to suspend the dividend and pay down debt more aggressively.
Additionally, the company trades under a dual class structure. Liquidity only exists in the class ‘B’ shares, which are non-voting. This adds to management risk and makes any sort of activist shareholder action virtually impossible.
Here’s an opportunity to buy a major brand (the country’s largest newspaper by circulation, even beating the nationally circulated The Globe and Mail) for significantly less than book value, all while collecting a 9% dividend. The company is profitable right now, and investors are looking at solid gains if they can find a way to get back to previous levels of profitability. Additionally, the scandal involving Rob Ford will be a nice short term boost, bringing traffic to the website and selling more newspapers.