Fool asks: Have we seen the worst at Thomson Reuters?
Tuesday 18 February 2014
Thomson Reuters shares are still not cheap but the attractive dividend yield, solid cash flow and ongoing share buybacks should support the stock price, the Motley Fool said in an analysis of last week's 2013 Q4 results.
“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 [C]$35,” it said.
The market reacted negatively to the results, which showed operating profit down by 50 per cent for the final quarter of 2013, and the stock price declined by more than five per cent after the announcement.
The company flagged the bad news well in advance, the Fool said. “The question now is: does the price decline offer an attractive investment opportunity?”
Operationally, the results were within previously indicated ranges with revenues slightly up and profit margins slightly below the 2012 levels. However, “simplification” charges of $275 million were levied in 2013 and a $500 million contribution was made to the company’s US pension fund. This substantially dented operating profits and negatively impacted the cash flow of the business.
“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.”
Asking “Have we seen the worst?”, the Fool said further “simplification charges” of $120 million, still to be charged this year, would continue to dampen profits. However, the company reports substantial progress with the simplification programme 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 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,” it said.
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 Fool’s 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 [C]$35.”
Thomson Reuters chief executive James Smith, in a message to staff after he announced the Q4 results, said he expected the environment for the company’s two largest markets to remain challenging this year. “Combined with the flow-through of 2013 net sales performance, this will likely temper our revenue growth again this year. Our underlying trajectory, though, is positive and I am confident that the actions we have taken, and will continue to take, will accelerate our progress.”
Smith said he was excited about the long-term outlook. “The macro trends that are causing so much short-term change should play right into our overall strengths. The explosion of information and the impact of regulation are shaping the global playing field as never before. And no company is better positioned than ours to help customers navigate this increasingly complicated world.
“Our deep vertical expertise, longstanding relationships with customers and broad global footprint are distinct advantages. Our customers trust us to help them separate the signal from the noise. We don't simply deliver information; we deliver confidence – the confidence to act on the most accurate, timely, relevant and trusted information.
“The transformation we began last year is taking hold. This year we will build on that momentum as we focus on innovating, becoming a simpler and more nimble organization, and reaffirming the purpose and values that bind us together. While a great deal of hard work lies in front of us, I am confident that the prize is worth the effort.”
Separately, Credit Suisse analysts restated an Outperform rating on TRI with a $41 price target on the stock. They told investors: “Despite some signs of stability in developed markets, the environment remains challenging due in part to ongoing European bank restructuring and emerging markets.” While the revenue backdrop for 2014 was “a bit disappointing (against low expectations)” they continue to see a scenario for self-recovery owing to improved market position with x3000 desktops mostly converted to Eikon, and an increasing focus on the buy-side; short-term revenue headwinds that should be less material in 2015; significant cost-cutting initiatives to lift margins in 2015 with more opportunity beyond as other platforms shut down; and shareholder friendly capital returns, with $300 million shares repurchased since October.
Other analysts who have recently weighed in on TRI include FBR Capital Markets which cut its price target from $44 to $41. It now has an Outperform rating on the stock.
One equities research analyst has rated the stock Sell, five have assigned it Hold and eight say Buy. The average rating is Buy and the average price target $37.96.
SOURCE ■ The Motley Fool ■
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