Torstar’s ongoing value trap part 2

I don’t want to sound sensitive, but a couple of the comments on Seeking Alpha regarding my earlier Torstar post (see prior post “Torstar’s ongoing value trap” Mar 30-14) got me thinking. Perhaps there is hidden value in Torstar’s assets, and that I’ve totally missed just how cheap the shares really are.

If you don’t recall, this is what the Globe and Mail’s columnist had to say last weekend:

Mr. Watsa recently bought the stock for roughly 54 per cent of book value and at 5.4 times average earnings estimates for the next 12 months, according to S&P Capital IQ. Those are attractive metrics for many value investors.

I’m most interested in the book value analysis, since that’s something we amateurs can do ourselves. Estimating the forward earnings of a company that saw revenue decline by ~10% last year is a bit of a mug’s game; but I feel somewhat more comfortable checking just how financially “attractive” Torstar is on a book value basis.

The first question you have to ask yourself is this: what do you make of Torstar’s Intangible Assets? And are they as valuable as those assets that are of a truly tangible nature?

Moreover, as a percentage of Torstar’s entire pool of assets, how large should the Intangible bucket be before you get nervous? And that’s where the math gets interesting.

According to the financial statements for fiscal 2013, Torstar’s assets are as follows:

Current Assets: $361.6M
Joint Ventures: $80.9M
Associated Assets: $40.2M
PP&E: $150.7M
Intangible Assets: $73.9M
Goodwill: $533.98M
Other: 11.5M
Employee Benefits Assets: $44.5M
Deferred Tax Assets: $51.3M

Total Assets: $1,348.7M

Total Liabilities: $551.928M

Book Value: $796.8M

How do you feel about those assets, now that you’ve seen them more or less in black and white? What Capital IQ (and Mr. Rothery) did was take the net book value figure of $796.8 million and compare it to the company’s market cap to come up with the 0.54x BV figure. Torstar’s market cap has risen since Mr. Rothery put his piece to bed, and it is now about $530 million — up an impressive 31% in a month. That works out to a current BV multiple of 0.67x; higher than 0.54x as at the time he wrote his piece, but still in the same general ballpark.

If you’re looking for a true value investment, would it bother you that 45% of Torstar’s gross asset pool is made up of intangibles and goodwill? Surely that’s not as great a story as a company with a book value multiple of 0.67x based primarily upon hard assets.

In Torstar’s case, if you were to back out the $608 million of goodwill and intangible assets, the company’s Tangible Book Value is a modest $189 million. Compare that to a market cap of $530 million today, and that 0.67x multiple becomes a whopping 2.8x.

No longer a “value stock” at that point, I’m guessing. One of my Seeking Alpha followers offered that Torstar was loaded up with lots of valuable real estate assets that weren’t reflected on the balance sheet. That may be true, and the machinery and equipment has been depreciated by almost $200 million, which could be another way to unlock value in a breakup if you were trying to be creative.

And yet, that is never going to happen.

The holders of Torstar’s voting shares will not be getting out of the newspaper publishing business. Ever. And while they might sell this asset or that, there are not enough hidden jewels to make up the $341 million delta between Torstar’s $530 million market cap and its $188.9 million of tangible book value. Unless they sell Harlequin, which would be odd given that it was the only profitable line of business last year.

As such, by almost any traditional definition, this isn’t a value stock. Unless of course you think the mere right to publish The Star, Spectator, Record, romance novels and some popular community newspapers is worth more than $600 million of intangible value. Just the right. Before you have to build the plant, design the software, hire the staff and market the offerings to a public that in many cases are paying far less to read books and newspapers than it did 20 years ago.

$600 million. That’s how much of Torstar’s $797 million of net book value is tied up in the brand. Not my idea of “attractive” value.

MRM