Thomson Reuters: Have We Seen the Worst?

Stock price drops after results announcement — is it time to sell?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Thomson Reuters (TSX:TRI)(NYSE:TRI) recently reported poor headline results with operating profit down by 50% for the final quarter of 2013. The market reacted negatively and the stock price declined by more than 5% after the announcement.

The bad news was flagged well in advance by the company. The question now is: does the price decline offer an attractive investment opportunity?

Why did the results look so bad?

Operationally, the results were within previously indicated ranges with revenues slightly up and profit margins slightly below the 2012 levels. However, “simplification” charges of US $275 million were levied in 2013 and a US $500 million contribution was made to the company pension fund. This substantially dented operating profits and negatively impacted the cash flow of the business. On a fully adjusted basis the earnings per share was US $0.49, only slightly below the market expectation.

The largest division, Financial and Risk, continued to struggle with a 10% decline in operating profits mainly caused by declining subscription related revenues. One highlight in this division was the growth experienced in the Governance and Compliance section driven by increasing regulatory requirements and oversight of the financial service industry.

The Tax and Accounting and Intellectual Property and Science divisions also experienced strong growth and increased operating profits by 10% and 17% respectively in the last quarter.

Have we seen the worst?

Further “simplification charges” of $120 million, still to be charged in 2014, will continue to dampen profits. However, the company reports substantial progress with the simplification program by shutting down more than 100 legacy platforms and products in the Financial and Risk division and a successful client migration to the new unified Eikon platform.

The company expects the corrective measures taken in 2012-13 to provide US$300 million of ongoing savings by 2015 which will support an improvement in the gross profit margin of the Financial and Risk division to around 30% by 2015. Based on our estimates, the achievement of this target could have a substantial positive impact on the overall company profits.

The turnaround of the Financial and Risk division is a work in progress. However, the company has the benefit of a prominent global franchise, a strong balance sheet and prolific cash generation capabilities, providing the breathing space to get the work done.

Is it time to buy?

The company profit guidance for 2014 indicates unchanged revenues and profit margins similar to the 2013 margins. The results for the first quarter of 2014 may also again be depressed by the remaining “simplification” charges. However, price increases ahead of the inflation rate for a wide range of Financial and Risk Division products came into effect from January 1 and overall financial markets continue to be supportive for the clients of this division.

The stock trades on a 2014 forward price/earnings ratio of 18 times, an enterprise value/EBITA of 10.2 times and a dividend yield of 3.8%. Apart from the attractive dividend yield, the stock is not cheap but is priced in line with listed peers.

Foolish bottom line

Although the stock is still not cheap, the attractive dividend yield, solid cash flow and ongoing share buybacks should support the stock price. In addition the stock offers exposure to a high quality global footprint, significant financial strength and the possibility of a strong improvement in the profitability of its largest division over the next few years. Look for entry points, ideally below $35.

Should you invest $1,000 in Thomson Reuters Corporation right now?

Before you buy stock in Thomson Reuters Corporation, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Thomson Reuters Corporation wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,750.10!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/22/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Deon Vernooy holds a position in Thomson Reuters.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Investing

data analyze research
Dividend Stocks

Better Stock to Buy Now: Manulife or CIBC?

Both Manulife and CIBC had a great year last year. It may be smart for investors to wait for a…

Read more »

grow money, wealth build
Dividend Stocks

TFSA Growth Strategy: Turn $350 Weekly Into $100,000

By investing $350 per week in index funds like iShares S&P/TSX 60 Index Fund (TSX:XIU) you can achieve a $100,000…

Read more »

dividend growth for passive income
Dividend Stocks

3 Top Canadian Growth Stocks to Buy Now for Long-Term Growth

Canadian growth stocks can be a great way to create long-term growth, and these are at the top of the…

Read more »

Caution, careful
Dividend Stocks

3 Big Red Flags That Could Trigger a CRA Audit on Your TFSA

TFSA users engaging in business-like activities for profit will trigger a CRA audit.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

TD Bank Stock: The Easy Money’s Been Made

After settling with US regulators, this Canadian bank stock should at least market perform, but should you buy more shares?

Read more »

Silver coins fall into a piggy bank.
Investing

Want Safe Dividend Income in 2025 and Beyond? Invest in the Following 3 Ultra-High-Yield Stocks

These three TSX royalty trusts pay above-average, steady dividends.

Read more »

grow money, wealth build
Dividend Stocks

3 Top Canadian Stocks to Buy for Dividend Growth

Discover three outstanding Canadian dividend-growth stocks that have consistently delivered double-digit payout increases, fueling income growth for long-term investors.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $50,000 in This Stock and Get $2,950 Back Per Year in Dividends

First National Financial (TSX:FN) stock throws off a lot of income.

Read more »