One of the criticisms of Canada’s stock market is the lack of technology companies. BlackBerry used to be one of the jewels of Canada’s market, but the company is currently a mere shadow of its former self. Canada also enjoyed international bragging rights during the dot com boom, as shares in Nortel Networks went up so much that they made up a full third of the value of the TSX Composite Index.
But lately, Canadian technology offerings have been slim. There are obviously plenty of small startups on the TSX Venture Exchange, but the large-cap market is largely devoid of technology. Out of the 250 some stocks that make up the TSX Composite, just eight are technology companies. This pales in comparison to almost every other industry in Canada, and certainly is much lower than in the United States, even after adjusting for the size difference.
Canadians interested in investing in tech might instead consider the following three companies, which may not seem like technology players on the surface. These companies own surprising digital assets, including some of Canada’s top websites. They are taking predictable cash flows from old businesses to invest in new technology.
It may not seem like Torstar (TSX: TS.B) is a technology company, since its main asset is a newspaper, the Toronto Star. Newspapers are as old media as you can get, and their struggles are well documented. Torstar also has a publishing division that produces books under the Harlequin Romance banner.
The company’s fortunes are increasingly tied to the internet. Newspaper circulation continues to decline, as customers of all ages consume more news online. Torstar has responded by charging users $10 a month for unlimited access to the Star’s website, to help generate some revenue from folks who have abandoned the physical copy of the paper.
Torstar’s online assets include Workopolis, Canada’s most popular destination for job seekers. It also owns WagJag (a daily deals site), Wheels.ca, YourClassifieds.ca, and a handful of others. Online media is well positioned to dwarf any growth in the print business.
Yellow Media (TSX: Y), the exclusive publisher of the yellow pages across Canada, famously went bankrupt in 2012 thanks to a crippling debt load and weakness in its main business. When was the last time you cracked open a phone book? Exactly.
The company has emerged from bankruptcy protection with a substantially reduced debt load and the flexibility to further add to its digital portfolio, which includes such popular websites such as YellowPages.ca, RedFlagDeals.com, Canada411.ca, and CanPages.ca, among others. Collectively, the company’s websites attract more than 7.5 million pageviews per month.
It’ll need to grow the online division, since total revenues fell more than 12% in 2013, and EBITDA fell 26%. And this is despite digital revenues growing more than 10% during the period. Only 85% of advertisers renewed their ads in the yellow pages. If Yellow Media is going to succeed, it’ll do so as a digital content company, not a phone book publisher.
Davis and Henderson
During the 1990s, Davis and Henderson (TSX: DH) had what seemed like an impenetrable business — printing cheques for banks. And then, technology ruined everything. Like every great company, management embraced the change and turned itself into a technology company.
Now Davis and Henderson is the leader in software used by the financial industry. It makes software that real estate agents and mortgage brokers use to manage data. It also provides technology that helps lenders recover property, manage loan defaults, and process student loans. If it’s a technology used by a financial institution, chances are Davis and Henderson is behind it.
The company’s technology division accounted for more than 75% of its revenues in 2013. Davis and Henderson is expected to grow earnings to $2.21 per share in 2014, putting it at a reasonable 14 times forward earnings, especially for a tech company. Oh, and it pays investors a generous 4.1% dividend.
Foolish bottom line
Unlike in the United States, Canadian investors don’t have many pure technology companies to choose from. These three names aren’t the most likely candidates, but they each have significant exposure to key websites or software. Each is investing heavily in technology because of declines in former rock solid businesses, to varying degrees of success. All three are interesting plays on new media and technology.