A Media Marriage That Isn't Bad News

04/22/2009 9:02 am EST

Focus: GLOBAL

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Thompson Reuters boasts a global reach, real synergies, and a decent dividend, writes Tom Slee in Internet Wealth Builder.

Even in these desperate times, some [companies] are managing very well and quietly laying a foundation for solid earnings growth when the recovery gets underway. A few even offer a good yield and downside protection while we wait. 

A company that I particularly like is Thomson Reuters (NYSE: TRI; Toronto:TRI.TO). It's low key, not terribly exciting, but trading at C$33.78 (US$27.59) and paying a US$1.12 dividend to yield 4.1%, the stock should provide investors with an excellent long-term return. [TRI closed at C$32.41 in Toronto and US$26.19 in New York Monday-Editor.]

On April 17, 2008, Thomson Corp. acquired Reuters Group, a 156-year-old news service company, for $17.2 billion and created a new financial information giant. With 50,000 employees in almost 100 countries, the new combined corporation controls 30% of the North American and 38% of European financial information and data markets. In addition, the company provides extensive legal, regulatory, tax, science, and health care information services through its electronic networks. Last year revenues totaled US$13.4 billion and generated earnings of US$3.3 billion, equal to US$1.91 a share.

The major news here was, of course, the friendly Reuters takeover. Perhaps surprisingly, there was almost no business overlap. Nevertheless, the companies expect to save more than US$500 million per annum after three years through synergies. 

The important thing, though, is that TRI is in the right business. The days of lawyers, doctors, or pharmacists wading through piles of circulars to keep themselves up to date are long gone. They use on-line databases provided and updated by Thomson. It's a growth industry, not entirely recession-proof, but certainly shielded during the economic downturn. Even more lucrative are TRI's online services to the financial community, now being aggressively expanded into China and India. 

The company is fundamentally strong with almost US$1 billion in cash on the balance sheet and a projected US$2-billion cash flow in 2009. One question mark is the Thomson family's voting control, although in fairness this has never been a problem for the small shareholders. Indeed, some analysts think that this personal involvement bolsters corporate governance.

TRI is bound to be hurt this year by the downturn in investment activity as institutions and brokers retrench, but a lot of its services are now essential to the professional community and provide a solid earnings base. At the same time, savings from the merger will continue to boost profit margins.

Assuming that the recession is going to deepen, profit could dip to about US$1.50 a share in 2009 but a recovery to the US$2 range is likely in 2010. Given this, I am setting an initial target of $42 which, based on next year's forecast, is a 17x earnings multiple. To put that in perspective, Thomson's P/E has averaged more than 26x over the last ten years.

Buy Thomson Reuters with a target of C$42. I have set a C$26 revisit level.

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