Thomson Reuters (TSX:TRI) is a Canadian financial information company best known for the Reuters digital newspaper. In addition to financial information, it also produces accounting and legal research software. The company is one of the biggest on the Toronto Stock Exchange, with a $107 billion market cap. The stock has done quite well in recent years, having risen 120% in price while paying a 1.3% yielding dividend.
Thomson Reuters is a much bigger enterprise than many people realize. In addition to the famous Reuters news service, it also offers the following:
- Westlaw: A legal research platform.
- Onesource: A tax accounting application.
- Checkpoint: An accounting research platform.
- CoCounsel: A generative AI assistant for lawyers and accountants.
- Fraud Detect: A (you guessed it) fraud detection application.
- OneSource: This allows businesses to check prices from many global suppliers.
- And many more.
The company has dozens of software offerings for niche business use cases, many of them in the legal and accounting worlds. The company also developed a Bloomberg terminal-like financial data platform called Eikon but sold it to the London Stock Exchange Group.
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A wide moat
One thing that Reuters stock undeniably has going for it is a strong competitive position. Reuters is one of the world’s most comprehensive financial news services. Other popular Thomson Reuters services like Westlaw have very few competitors. The two services just mentioned make up a large proportion of Thomson Reuters’s revenue. So, we can safely conclude that that TRI has a strong competitive position.
Strong operating performance
Consistent with its strong competitive position, Thomson Reuters has delivered strong operating results over the years. Over the last 12 months, it grew its revenue, earnings and free cash flow at the following rates:
- Revenue: 6%.
- Earnings: 6%.
- Free cash flow: 97%.
In the same period, the company had the following profitability metrics:
- Gross margin: 39%.
- Net margin: 32%.
- Free cash flow margin: 19%.
- Return on equity: 19%.
- Return on capital: 7%.
So, overall, we have a pretty strong showing on both growth and profitability from Thomson Reuters.
A steep valuation
Having looked at Thomson Reuters’s recent performance, we can now take a look at the valuation multiples. It is here that things start to get a little iffy. At today’s price, TRI stock trades at the following:
- 46 times earnings.
- 11 times sales.
- 6.7 times book value.
- 30 times operating cash flow.
This is frankly a little steep for a company growing its earnings at 6% year over year. Granted, TRI is highly profitable and thriving. But the price of admission is rather high.
My verdict: It’s a hold
For my money, Thomson Reuters is a hold, a stock that investors are reasonably safe owning, but not the most interesting place to deploy fresh capital into today. The company is an undeniably strong one, but the stock is already priced with that fact in mind. TRI stock could definitely make for an interesting buy during a market crash or some other incident that lowers its price. But it appears the gains for those buying today will be rather slow.
