EUR 850.00 For Business Accounts Only

Morningstar | Thomson Reuters Making Headway With Its Post-Divestiture Strategy; Posts Decent 1Q Results

Narrow-moat Thomson Reuters showed good progress with its business transformation efforts in the first quarter, posting 8% revenue growth and 2% operating profit growth compared with the year prior. Adjusted EPS, which excludes the discontinued financial and risk business, was $0.36 for the quarter, an improvement from fourth-quarter adjusted EPS of $0.20. Regarding expenses, management is expecting one-time costs of $330 million in 2019 and advised that 2020 should be the first year of normalized operations following the sale of the F&R business, now called Refinitiv. While adjusted transactions and global print revenue declined compared with last year, results in these segments are generally quite volatile and account for just 17% of total sales. Recurring revenue, a better measure of sustainable business growth, was up 8%. We remind investors that part of the Reuters News portion of revenue, which was up 115% and now accounts for 11% of revenue, is a low-margin revenue source that comes from the 45% ownership of the divested F&R business. We reiterate our positive view of the strategic benefits of the Refinitiv divestiture and maintain our fair value estimate of $49.50 per share.

As for capital allocations, Thomson Reuters announced in February a 4-cent dividend increase to an annualized $1.44 per share. Given results thus far, we expect a payout ratio of about 100% for the year. Share repurchases totaled $190 million in the quarter, about 4.5% of current market cap, $40 million of which was used from the proceeds of the Refinitiv sale. The 22% run-up in the share price to start the year led to fewer share repurchases than we expected. Repurchases will likely continue to be a material use of capital going forward, with an additional $250 million of shares authorized by the board. We expect repurchases to average about $600 million per year in the coming years, though uncertain company results and fragile economic conditions are risks to this projection.

Apart from its earnings beat, Thomson Reuters also showed an improvement in profitability for the quarter. Operating margins were up 790 basis points to 26.7%, higher than our full-year expectation of about 23%. On the earnings call, management advised that margins will likely show improvement on a year-to-year basis, but first-quarter margins were probably higher than should be expected for the rest of the year. We continue to expect full-year margins in the 22%-25% range, especially considering management’s comments that it will look at taking down margins to invest in growth if results for the year continue to exceed guidance. Looking at specific segments, EBITDA margins of the Legal Professionals segment posted the highest margin gains, up to 38.2% from 32.6%, while Reuters News margins declined to 10% because of the addition of low-margin Refinitiv sales. Although overall year-over-year margins are down 440 basis points, we don’t think comparing current results with year-prior periods is very informative because of the structural changes that occurred at Thomson Reuters last year. Overall, the company showed enough evidence that it’s on the right track with its attempts to focus on growth in the higher-return legal data and accounting software segments.