Thomson Reuters Earnings to Take a Hit from Lehman Bankruptcy

With Lehman Brothers Holdings Inc. (LEH) accounting for an estimated 1% of Thomson Reuters Corp.’s (TRI) revenues, assuming most of this is lost, it means a 3% downgrade to the company’s 2009 earnings per share [EPS]. It's also likely that Merrill Lynch & Co. (MER) has a similar amount to Lehman, UBS Securities said in a report.

UBS analyst Jeffrey Fan told clients:

Given the lag factor between job cuts and cancellations, we believe the brunt of the investment banking downturn is likely to be felt from Q4 2008 onwards and ongoing investment banking consolidation will weigh on sentiment.

During the 2002-2004 downturn, Thomson’s Markets business lost 18% of its revenues from peak to trough, he added. And while things are different this time, the analyst sees substantial downside risks to conservative assumptions of flat Markets growth in 2009 and 2010.

Mr. Fan said that with Thomson Reuters already trading at a premium of 17 times 2009 estimated EPS, the additional downside risk to earnings makes the risk reward “unattractive.” He continues to rate the shares a “sell” with a $28 price target.