EUR 850.00 For Business Accounts Only

Morningstar | Strong Growth in Legal Drives the New Thomson Reuters' 2Q

Narrow-moat Thomson Reuters’ vision for its company after divesting its financial and risk business is starting to get clearer. For the quarter, revenue from continuing operations increased 2.4% from the previous year to $1.3 billion. Year to date, revenue has increased by 3% from the first six months of 2017. While this growth may not sound like much, this is an improvement from before Thomson Reuters decided to divest its F&R business. In addition, Thomson’s legal segment is proving to be a bright spot for the company. For the first half of 2018, growth in the segment has noticeably accelerated, with revenue growing by more than 5%. This is growth not seen in legal for the last several years. We now expect that legal revenue will grow by 5% this year, a 2% increase from our previous forecast. Given this, we're increasing our fair value estimate to $46 per ADR share from $43.50. In addition, we're increasing our fair value estimate for Thomson's Canadian shares to CAD 60 from CAD 56 per share. Our fair value estimate assumes a CAD/USD exchange rate of 1.3 as of Aug. 8.

In addition, we will remind investors that our fair value estimate depends highly on our assumption for share repurchases, as of today’s price, the company will be buying back about a third of its market cap. Currently, we assume shares are repurchased at $42 per share, which is approximately the current share price. Should shares in Thomson Reuters continue to climb, we’ll have to lower our fair value estimate. As we said last quarter, the best thing that could happen to shareholders would be a decline in the share price. If shares fall enough, remaining shareholders could see a materially higher dividend.

Overall, we’re encouraged by what we have seen since Thomson Reuters announced that it would divest a majority share of its financial and risk business. We’ll remind investors that although Thomson is selling only 55% of its stake in F&R, the deal is a leveraged recapitalization and Thomson is effectively paying itself a large dividend, which further decreases its stake in the business. Given the news that Merrill Lynch is replacing Thomson with FactSet for market data, it would appear that Thomson is getting the better end of its deal with Blackstone. We continue to believe that the F&R business will struggle and news of it losing a large customer is what we’ve been anticipating.

During the call, management described its new Westlaw Edge product with many superlatives. We have yet to see how much of an improvement this new product is, but we’re encouraged that Thomson is introducing new products and plans to increase investment in businesses that previously had to compete with F&R. Within its legal segment, total operating expenses were $561 million, an increase of 7.5% from the previous year. Given that F&R attracted much of Thomson’s spending and capital expenditures, we suspect there were likely some neglected opportunities in legal and tax. After the divestiture, these are opportunities that could be exploited to benefit remaining shareholders.