Torstar: Gains Through Diversification

| About: Torstar Corp. (TORSF)

By David Berman

It is hard to love a newspaper stock these days, what with eyeballs gravitating toward – cough! – online sources of news and information. That’s why we had to take a closer look at the TD Newcrest’s upgrade of Torstar Corp. (OTC:TORSF), best known as the publisher of the Toronto Star but a company that also publishes Harlequin romance novels and community papers.

Analyst Scott Cuthbertson added the stock to TD Newcrest’s Action List, arguing that the stock is an ideal way to play an economic recovery. Already, the upgrade appears to have given the stock a nice 15% boost.

Torstar’s primary business is community newspapers, which have been hurt by the recent cycle, but [it is] better insulated against some of the more secular pressures affecting major market dailies,” he said in a note. “The higher margins, lower levels of competition, and more proprietary content in community newspapers adds up to a much more resilient business model than that of major market dailies, in our view.”

Indeed, the health of the Toronto Star newspaper barely factors into this call. According to Mr. Cuthbertson, more than half of Torstar’s estimated 2010 earnings before interest, taxes, depreciation and amortization will come from its community papers and digital business. Another 40% comes from Harlequin.

“We have seen Torstar do well coming out of recessions before,” he said. “We believe that high operational leverage, combined with the cost cuts made last year, will add up to double digit EBITDA growth in 2010.”

He has a 12-month price target of $10 on the stock, implying a gain of 38% over its price on Tuesday afternoon. In the meantime, he likes the stock’s 5.9% dividend yield.