No media company should be priced north of 10 times sales and 33 times earnings with artificial intelligence about to make it cheaper than ever to compete. However, Thomson Reuters Corp. (TRI, Financial) is more than just a media company, and its transition into more of a software as a service provider is nearly complete.
To pivot, Thomson Reuters had to get smaller
In the last decade, the company’s financial position has shrunk through continued divestitures. Sales have gone from $12.7 billion to $6.7 billion, while total assets have dropped from $32 billion down to $21 billion. However, the idea was to get lean and remain extremely profitable. Thomson Reuters has succeed, with gross profit margins improving from 27% in 2013 to 31% in 2017 to nearly 39% over the last 12 months. The multinational media conglomerate generated $1.39 billion in net profit during 2022, boasting a net margin 1,000 basis points higher than the sector median, which certainly helps it remain an industry leader.
About Thomson Reuters
The company traces its roots back to the 1850s, while the current entity was formed in April 2008 when Thomson Corp. purchased Reuters Group. Currently, Thomson Reuters operates in more than 100 countries, providing information for professionals in the legal, tax and accounting, health care, science and media markets. It also provides news services to a wide array of businesses and consumers worldwide. The company divides its services into five segments:
- Legal Professionals: This segment includes research products for legal professionals and services to manage law firm business functions.
- Corporates: This division includes a broad suite of products and services to serve the needs of corporate professionals, including those in the tax, legal, compliance and in-house legal markets.
- Tax & Accounting Professionals: This unit offers products and services for professionals in accounting firms.
- Reuters News: This business provides real-time, multimedia news around the world. It is one of the world's largest international multimedia news providers.
- Global Print: It is a declining business which sells primarily legal and regulatory books in print format.
Refinitiv and the London Stock Exchange Group
The company is also in the process of divesting its stake in the London Stock Exchange Group (LSE:LSEG, Financial). Just two days ago, a group of investors, including certain investment funds affiliated with Blackstone (BX, Financial) and Thomson Reuters, sold 33 million shares of the London Stock Exchange for approximately $3.4 billion. As of the close of 2022, Thomson held 72 million shares scheduled for divestment. During the first quarter of 2023, it sold 24.5 million of these shares for a total of $2.3 billion. The company is expected to sell 17 million shares in 2023, 22 million in 2024 and the remaining 8 million in 2025.
In January 2018, Thomson Reuters sold a 55% majority stake in its financial and risk business to private equity firm Blackstone Group. The deal was valued at $20 billion, completed that October and subsequently rebranded the segment as Refinitiv. Refinitiv was a major source of revenue for Thomson Reuters, providing financial data, analytics, trading platforms and other services to the financial industry. Thomson cannot fully divest its position until January 2025, but the cash infusions should help it invest in growth opportunities over the next couple of years.
Improving shareholder value
Thomson has proposed a capital return transaction, which includes a $4.67 per share cash distribution and a reverse stock split. This proposed transaction would not incur tax for Canadian shareholders, while non-Canadian shareholders may choose to forego the cash distribution to avoid a reduction in their share count due to the reverse split.
Simultaneously, Thomson has been decreasing its liquidity through share buybacks. The company completed a $2 billion share repurchase program in the first quarter, which was initially announced in June 2022. Additionally, it recently finalized a $500 million acquisition of SurePrep and increased its annual dividend by 10% to $1.96 per share in February. Selling out its investment in the London Stock Exchange will help fund this focus on returning value to shareholders. The company has already repurchased a significant amount of its stock over the last decade, shrinking shares outstanding from 744 million to 476 million, with an additional 6 million likely to be taken off the market in the next year.
Embracing artificial intelligence
In terms of threats to its model, Thomson is escalating its involvement in and even seemingly embracing artificial intelligence. With decades of expertise in areas like probabilistic recovery and machine learning, the company has allocated a significant portion of its mergers and acquisitions budget to AI, which is projected to be around $10 billion through 2025. A further $100 million per year is set to be invested into its flagship products starting in the latter half of this year.
In 2022, Thomson further bolstered its AI capabilities by acquiring PLX AI, a real-time financial news service leveraging AI technology.
The new Thomson Reuters is set to transition from a holding company into more of an operational entity, allowing the company to reinforce its commitment to industry-leading software such as Westlaw in the legal field and Checkpoint in tax and accounting. These tools are used by an extensive customer base that encompasses the big four global accounting firms and almost all of the top 100 U.S. legal and accounting firms.
More importantly, the company's excellent user retention rates in the legal and accounting sectors (which significantly overlap with corporate) should assist Thomson Reuters in gradually transitioning to cloud-based software or SaaS offerings without losing its customer base.
Conclusion
Despite these positive developments, Thomson Reuters' stock may not appeal to value investors at the moment.
The company's shares are currently trading near their all-time high, priced like a tech company still experiencing massive growth at 9 times sales and 33 times forward earnings. It is not likely to live up to these figures in terms of growth prospects; however, the company’s model is not in danger. Thomson Reuters will be generating revenue from the same products and services in 10 years. And, as its customers grow, so will the stock.
