Blue chip stocks: Thomson Reuters reinvents itself as a seller of information products with restructuring and a big acquisition

Thomson Reuters

The availability of free information on the Internet has challenged the survival of traditional media. But some media firms have adapted with profitable new products. Today, we look at Thomson Reuters, a company that sold its newspaper business more than 10 years ago to focus on niche information products. The company acquired access to high-quality financial data with its purchase of Reuters news agency in 2008. Along with an ongoing restructuring plan that has cut costs, the moves have begun to boost profits. The company also continues to develop specialized products, including software that helps banks and other companies comply with complex legal rules. We view Thomson Reuters as a blue chip stock to buy for conservative investors.

The old Thomson Corp. wisely got out of the newspaper business in the early 2000s to focus on its faster-growing information-services operation. In 2008, it added more high quality financial data when it acquired the 160-year-old Reuters news agency for $17 billion U.S. in cash and shares. This deal also cut Thomson’s high reliance on North America.

The company’s timing was bad, however, as the 2008/09 financial crisis forced many of its banking and brokerage clients to spend much less on information products. That delayed the gains Thomson expected from the Reuters deal.


7 Christmas Stocks for a Happy New Year

Our special report for the tax-loss selling season is ready. To reduce capital gains tax for 2015, many investors will sell off stocks before year’s end—including great stocks that are down in price but due for a big rebound. We name seven stocks with the best chance to soar when tax-loss selling ends…and their price is right today. You can download this report now.

Download this free report  >>


However, the company is now benefiting from this acquisition, as well as a long-range restructuring plan. That’s pushing up its earnings and freeing up cash for share buybacks and dividends.

THOMSON REUTERS CORP. (Toronto symbol TRI; www.thomsonreuters.com) sells a variety of information products in over 100 countries. The descendants of newspaper publisher Roy Thomson (Lord Thomson of Fleet) own 58% of the company.

Thomson’s main division provides information products for financial clients, such as banks and brokerages. These offerings include real-time stock quotes, foreign exchange rates, commodity prices and other data. In 2014, this business supplied 53% of Thomson’s revenue and 39% of its earnings.

Thomson also sells specialized information to professionals in the legal (28%, 39%); tax (11%, 12%); and intellectual property and science (8%, 10%) fields.

The Americas supply 60% of its revenue, followed by Europe (30%) and Asia (10%). Following the purchase of Reuters in 2008, Thomson decided to sell some of its less-important operations, including its medical-science information business. Under a later restructuring plan, the company streamlined its remaining divisions and reorganized its sales force.

These moves explain the company’s somewhat erratic results in the past few years.

Blue chip stocks: New electronic data terminals to cut costs, add income

Thomson’s revenue dropped to $12.6 billion in 2014 from $13.3 billion in 2012. However, if you focus on its ongoing operations and exclude the negative impact of currency rates, revenue improved 1% in 2014.

Overall earnings declined to $1.54 a share (or a total of $1.3 billion) in 2013 but rebounded to $1.85 a share (or $1.5 billion) in 2014 as Thomson began to benefit from the restructuring. The company aims to cut $400 million from its annual costs by 2017.

In the three months ended September 30, 2015, Thomson’s revenue declined 4.1%, to $3.0 billion from $3.1 billion a year earlier. Without exchange rates, revenue rose 1%. Overall earnings gained 12.2%, to $405 million from $361 million, while earnings per share rose 15.6%, to $0.52 from $0.45.

Thomson continues to phase out its older electronic terminals, which deliver news and financial data to traders and portfolio managers, and upgrade these users to its new Eikon platform. This switch makes it easier for Thomson to launch new features and cuts its maintenance and support costs. It expects to convert nearly all of its clients to Eikon terminals by the end of 2015.

Meantime, the company continues to develop promising new products. For example, its new software helps international banks and other lenders comply with the U.S. Foreign Account Tax Compliance Act, which aims to keep U.S. citizens from evading taxes through offshore accounts.

The company has also launched other, similar software, such as programs that help businesses detect fraudulent transactions and comply with economic sanctions on foreign countries.

Thomson can easily afford to keep developing new products: as of September 30, 2015, its long-term debt was $6.9 billion, or a moderate 21% of its market cap. It also held cash of $710 million. The company is now looking to sell its intellectual property and science division, which would free up more cash for share buybacks. It spent $1.0 billion on repurchases in 2014 and a further $1.25 billion in the first nine months of 2015.

In addition, Thomson has raised its dividend each year for the past 22 years. The current annual rate of $1.34 a share yields 3.3%.

Thanks to the success of the company’s cost-cutting plan, the stock has gained 86% since the start of 2013. It now trades at 19.8 times the $2.06 a share Thomson will likely earn in 2015. Its earnings should improve to $2.30 a share in 2016, and the shares trade at 17.7 times that forecast.

These are reasonable multiples in light of Thomson’s hard-to-replace products. The company also continues to get around 90% of its revenue from subscriptions, which gives it steadier revenue streams than one-time purchases.

To top it off, over 90% of the company’s revenue comes from electronic products, which cuts its printing and delivery costs.

Recommendation in The Successful Investor: BUY 

For our advice on how to identify the real blue chip stocks from the ones resting on their reputation, read What are blue chip companies?

For more on the best way to strengthen your portfolio with blue chip stocks, read 5 profitable tips for investing in blue chip stocks.

Comments

Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.