Thomson Reuters (TSX:TRI) is easily one of Canada’s most important companies. A diversified financial media conglomerate, it supplies much of the world’s information. Not only that, but Thomson Reuters is a rare media name that is growing and thriving. The company avoided most of the advertising problems that crushed other newspapers when big tech took over, because it built a business model based on subscriptions and proprietary data. As a result, Thomson Reuters is doing quite well as a business.
That doesn’t automatically mean that TRI stock is a buy, though. To the contrary, it’s actually rather expensive, trading at 30 times earnings. So, the thesis for investing in the stock on the basis of the business being high quality is complicated by valuation. In this article, I will explore the pros and cons of investing in Thomson Reuters stock so you can decide whether it is right for you.
Thomson Reuters’ business defined
Thomson Reuters is a financial information company that operates as a media publisher and software company. Its businesses include:
- Reuters, an online financial newspaper.
- Westlaw, a legal research service.
- Various accounting, supply chain, and risk management software businesses.
On the whole, Thomson Reuters is a high-quality business that avoids the main problem media companies have historically had, which is relying too much on advertising. Reuters itself is a subscription service, so it does not “need” advertising to make money. Also, Thomson Reuters has various software offerings to supplement its core media business, which gives it a diversified revenue stream.
Profitability
Thomson Reuters’ profit metrics are quite strong. The company has a 39% gross margin, 27% EBIT margin, 31% net margin, 17% free cash flow margin, and 17% return on equity (ROE). All of these figures are above average, suggesting that Thomson Reuters is a very profitable company.
Growth
You might think that Thomson Reuters, as a media company, would not be growing much. But think again! Historically, TRI has grown quite a bit. Over the last five years, it has grown key financial metrics at the following CAGRs (compound annual growth rates):
- Revenue: 5%.
- Net income: 11%.
- Earnings per share (EPS): 18.5%.
These are pretty decent growth rates, particularly in EPS. If Thomson Reuters can continue its growth track record for the foreseeable future, then it will be able to raise its generous dividend, which already yields 5.15%!
Valuation
Now we get to the least flattering part of the analysis for Thomson Reuters: its valuation. While TRI is unquestionably a great company, its stock is quite pricey. Based on today’s stock price and the last 12 months’ financials, TRI trades at:
- 42 times adjusted earnings (‘adjusted earnings’ means earnings calculated how the company sees fit).
- 30 times GAAP earnings (‘GAAP earnings’ means earnings calculated by the official accounting rules).
- 9.2 times sales.
- 5.4 times book value.
- 27 times operating cash flow.
It’s a pretty pricey stock – especially for a media company. TRI would need to give you nearly 10 years’ worth of its revenue to pay back your investment in the form of dividends! On the other hand, the company is growing, so perhaps it will “grow into” its valuation over time. For the time being, though, I’ll pass on buying TRI stock.
