Investment Thesis: Thomson Reuters (NYSE:TRI) could see further growth across the Legal Professionals and Corporates segments as companies demand access to legal intelligence services as a result of a more complex regulatory environment.
Thomson Reuters is a leading global provider of news and information services.
Operating through the segments of Legal Professionals, Corporates, Tax and Accounting, Reuters News, and Global Print - the company is known for providing intelligence services to a wide variety of corporations and governments, as well as its role as a leading news and media provider.
The stock saw a strong climb leading up to 2022, but the stock has seen a pullback in line with broader bear market sentiment:
The purpose of this article is to establish whether the recent decline in price is market-driven and whether Thomson Reuters could have significant scope for a rebound from here.
Sourced from historical quarterly earnings presentations - here is a breakdown of quarterly revenue figures across the company's business segments from 2018 to the present:
Averaging by year using SQL - here is the average revenue figure for each business segment for each year (with just the first quarter of data included for 2022):
For Reuters News, the jump in revenue for Q4 2018 was as a result of an agreement between Reuters and Refinitiv, whereby Reuters provides Refinitiv with news and editorial sources in exchange for revenue of $325 million per year as part of a 30-year agreement.
From 2019 to 2021 - the Legal Professionals segment (also the largest by revenue) showed the biggest increase on a percentage basis at just over 12% during this period.
With that being said, if taking the first quarter of 2022 into consideration, Corporates and Tax and Accounting showed the most growth at 24% and 19%, respectively. While Global Print has shown a decline in revenue since 2018, growth across other segments has compensated for this.
According to the company - rising complexity of regulations and compliance considerations across the Legal and Tax domains has contributed to a significant growth in demand in Q1 2022.
Additionally, with 77% of the Corporates segment reportedly consisting of recurring revenues, growth in Practical Law, CLEAR and Indirect Tax has driven revenue across the Corporates segment - as companies separate to traditional law firms seek legal intelligence against a backdrop of a more challenging regulatory environment.
With Practical Law having shown a 16% growth in CAGR since being acquired in 2013 (and nearly 40% from revenues coming from the Corporate segment) - this leaves significant scope for further growth should we see demand from the Corporate segment continue to increase.
According to a report titled "Ten Key Regulatory Challenges of 2022" by KPMG, 52% of CEOs in the United States reported that there is significant demand from stakeholders for increased reporting and transparency on issues within the Environmental, Social and Governance sphere.
With climate change and the push to green energy becoming a key ethical concern - exacerbated by the ongoing situation between the West and Russia as a result of energy disputes - we are likely to see more demand for legal intelligence across this area as companies increasingly strive to remain compliant with the regulatory environment across this domain.
Moreover, legal considerations across the data and finance sectors are also likely to increase across this decade - as laws surrounding data privacy continue to evolve and the legal frameworks governing the use of cryptocurrencies and other digital assets also become more widespread.
From this standpoint, I anticipate that we will continue to see strong growth across the Legal Professionals and Corporate segments - which is expected to drive further revenue growth for Thomson Reuters.
In terms of potential valuation, we can see that earnings (before interest and taxes) have rebounded strongly from levels seen pre-2020. However, the EV/EBITDA ratio has also risen - implying the stock is more expensive when compared to the first half of the 10-year period illustrated below:
In addition, while revenue growth has been strong, such growth has also necessitated an increase in capital expenditures.
In the most recent quarter, we have seen long-term debt rise slightly as compared to the previous quarter while cash and cash equivalents have decreased:
Looking forward, I anticipate that while investors will welcome continued revenue growth - they will also want to see more evidence of cash generation as well as evidence that the company can bolster capital expenditures without having to grow long-term debt.
Overall, the growth in revenue for Thomson Reuters has been encouraging and I do not see signs of slowing revenue growth for the reasons outlined above.
Should revenue growth be sufficient to bolster cash levels once again and concurrently decrease long-term debt levels, then this will be an encouraging sign.
I am optimistic that the stock can see a rebound in upside to prior highs of near $160 going forward.
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