The S&P Publishing & Printing Index advanced 53.2% year to date. With this positive trend, let's take a look at two companies in the media sector and see which one is doing better and thus stands as the best investment.
Thomson Reuters Corp. (TRI) was created through the merger of Thomson Corp and Reuters in April 2008. As a result, it is the world's leading source of intelligent information for businesses and professionals. The new company has four segments: Legal (27% of 2012 revenues), Tax & Accounting (9%), Intellectual Property & Science (7%) and Financial & Risk (about 56%). In each segment, the firm wants to be a market leader and according to the company it maintains a No. 1 position in its Legal and in the Tax & Accounting segment; a second place in the Intellectual Property & Science area, and is also the largest provider of global financial information in the Financial & Risk segment.
Turnaround in the Key Financial & Risk Segment
The first three segments account for about 40% of total revenue and operate in a growth environment, with low risk to economic downturns. In the Financial & Risk division (60% of total revenues) the firm is a principal player selling equipment and data to investment banks and other institutions along with its competitor: Bloomberg.
Its Eikon and Electron platform will boost sales as it is increasingly adopted by the core customer base. Great effort has been made to include real-time news, fundamentals, economic reporting and analytics; as well as creating apps for retails users. However, a weak financial market has slowdown the segment's performance over the last year, so a key priority for 2013 is accelerating growth and penetrating in faster growing regions.
Stock Price Appreciation
Thomson Reuter's share price has increased by 26.40% over the past year, despite their weak earnings growth during the last quarter. This sharp appreciation is one of the factors that investors should take into consideration.
In terms of valuation, the stock sells at a trailing P/E of 28.1x, trading at a premium compared to an average of 20.9x for the industry. Analysts’ expectations imply a forward P/E of 17.99. To use another metric, its price-to-book ratio of 1.8 indicates a discount versus the industry average of 2.3x and the price-to-sales ratio of 2.3x is below the industry average of 1.36x.
A Larger Competitor
Gannett Co. Inc. (GCI) is the largest newspaper publisher in the U.S. and operates as a media and marketing solutions company, both in the U.S. and internationally.
Diversifying the Business
The company reports operating results under three segments Publishing (70% of 2012 revenues), Broadcasting (17%) and Digital (13%). Operational focus has shifted over the past five years as the company adapts to new market demands. The last two segments have gained in relevance and investment levels, at the expense of publishing.
The Belo Acquisition
On June 13, 2013, the firm announced its intention to purchase Belo Corp. a Dallas-based media company and its 20 local TV stations for $2.2 billion. With the deal, the company could raise the broadcasting business and is expected to generate more than half of total EBITDA in the following years. The management believes this transaction would generate $175 million of synergies within three years. The deal can be close by year-end 2013.
Its P/E multiple on a trailing-12 month basis is 14.3 and the forward P/E multiple is 9.56. The current dividend yield is 2.91%, which is quite good to protect the purchasing power. Compared to its closing price of one year ago, Gannett's share price has jumped by 63%, exceeding the performance of Thomson Reuter during the same time frame.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
|Company||ROE||Compared to Industry Mean (=9.74)|
It is very important to understand this metric before investing in a high-growth company.
It seems difficult to decide which of the described companies will perform better in the future. I think both of them are well positioned to take advantage of future market conditions. However, the stock price increase that Gannett experienced was too big.
In my opinion is the right time to add Thomson Reuter’s stock to your long-term portfolio; due to its diversified business model, the firm is well positioned to outperform its peers. Hedge fund guru like Steven Cohen added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to theirsas well.
Disclosure: Victor Selva holds no position in any stocks mentioned.