Why Transcontinental Inc. Is up Over 3%

Transcontinental Inc. (TSX:TCL.A), Canada’s largest printer, released its third-quarter earnings results this morning, and its stock responded by rising over 3% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should be long-term buyers today or wait for a better entry point in the trading sessions ahead.

The results that ignited the rally

Here’s a quick breakdown of eight of the most notable financial statistics from Transcontinental’s three-month period ended on July 30, 2017, compared with its three-month period ended on July 31, 2016:

Metric Q3 2017 Q3 2016 Change
Printing and packaging products revenue $370.4 million $342.8 million 8.1%
Publishing and content products revenue $70.0 million $85.1 million (7.2%)
Other product and services revenue $37.3 million $39.9 million (6.5%)
Total revenue $477.7 million $467.8 million 2.1%
Adjusted operating earnings $69.9 million $62.7 million 11.5%
Adjusted operating margin 14.6% 13.4% 120 basis points
Adjusted net earnings $50.1 million $44.1 million 13.6%
Adjusted net earnings per share (EPS) $0.65 $0.57 14.0%

What should you do now?

It was a great quarter overall for Transcontinental, and the results surpassed the consensus estimates of analysts polled by Thomson Reuters, which called for adjusted EPS of $0.56 on revenue of $461.08 million. The company also performed very well in the first nine months of fiscal 2017, with its revenue up 1.1% to $1.48 billion, its adjusted net earnings up 11.9% to $133.9 million, and its adjusted EPS up 12.3% to $1.73.

With all of this being said, I think the market has responded correctly by sending its stock higher, and I think it still represents a great long-term investment opportunity for two fundamental reasons.

First, it’s still wildly undervalued. Even after the +3% pop, Transcontinental’s stock still trades at just 10.1 times fiscal 2017’s estimated EPS of $2.52, which I think is much too low. I think it could easily command a multiple of 12-15 times earnings, which would place its shares upwards of $30 by the end of the year.

Second, it has a fantastic dividend. Transcontinental currently pays a quarterly dividend of $0.20 per share, equal to $0.80 per share annually, which gives it a generous 3.15% yield. Investors must also note that the company’s recent dividend hikes, including its 8.1% hike in March, have in on track for 2017 to mark the 16th consecutive year in which it has raised its annual dividend payment, making it both a high-yield and dividend-growth play today.

With all of the information provided above in mind, I think Foolish investors should consider initiating long-term positions in Transcontinental today with the intention of adding to those positions on any significant pullback in the future.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. 

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