Investment thesis: Thomson Reuters (NYSE: TRI) could see greater growth in the Legal and Corporate Professionals 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, business, tax and accounting professionals, 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 leading news and media provider. .
Shares experienced a sharp rise until 2022, but equities have experienced a decline in line with broader bear market sentiment:
The purpose of this article is to establish whether the recent price drop is driven by the market and whether Thomson Reuters could have a significant margin for a rebound from here.
From historical presentations of quarterly results: here is a breakdown of quarterly revenue figures for the company’s business segments from 2018 to the present:
Average per year using SQL: Here is the average revenue figure for each business segment for each year (with only the first quarter of data included for 2022):
For Reuters News, the fourth quarter 2018 revenue jump was the result of an agreement between Reuters and Refinitiv, whereby Reuters provides Refinitiv with news and editorial sources in exchange for $ 325 million in annual revenue as part of a 30-year agreement.
From 2019 to 2021 – the Legal Professionals The segment (also the largest by revenue) showed the largest increase in percentage with just over 12% during this period.
That said, if you consider the first quarter of 2022, Companies i Taxation and Accounting showed the highest growth with 24% and 19%, respectively. While Global Print has shown a decline in revenue since 2018, growth in other segments has offset it.
According to the company, the increasing complexity of regulations and compliance considerations in the legal and tax domains has contributed to a significant growth in demand in the first quarter of 2022.
In addition, as 77% of the business segment consists of recurring income, growth in Practical Law, CLEAR and Indirect Taxes has generated revenue across the Business segment, as companies separate from traditional law firms they seek legal intelligence in a context of more demanding regulations. natural environment.
As Practical Law has shown 16% growth in CAGR since it was acquired in 2013 (and almost 40% of revenue from the Corporate segment), this leaves significant room for growth if we see that the demand for the Corporate segment continues increasing.
According to a report titled “Ten Key Regulatory Challenges of 2022” by KPMG, 52% of U.S. CEOs reported that there is significant demand from stakeholders to increase information and transparency on issues within the environmental, social and government.
With climate change and the push for green energy becoming a key ethical concern, exacerbated by the current situation between the West and Russia as a result of energy disputes, we are likely to see more demand for intelligence. legal competence in this area as companies increasingly strive to continue to comply with the regulatory environment in this area.
In addition, legal considerations in the data and finance sectors are also likely to increase over this decade, as data privacy laws continue to evolve and the legal frameworks governing the use of cryptocurrencies and other digital assets as well. they extend further.
From this point of view, I anticipate that we will continue to see strong growth in the legal and corporate professional segments, which is expected to drive further growth in Thomson Reuters revenue.
In terms of potential valuation, we can see that earnings (before interest and taxes) have recovered strongly compared to pre-2020 levels. However, the EV / EBITDA ratio has also increased, implying that the stock is more expensive compared to the first half of the 10-year period shown below:
In addition, although revenue growth has been strong, this growth has also required an increase in capital expenditures.
In the most recent quarter, we saw long-term debt increase slightly compared to the previous quarter, while cash and cash equivalents decreased:
Looking to the future, 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 increase capital spending without having to grow. long-term debt.
Overall, Thomson Reuters revenue growth has been encouraging and I see no signs of slowing revenue growth for the reasons mentioned above.
Should revenue growth be enough to raise cash levels once again and at the same time reduce long-term debt levels, this will be an encouraging sign.
I am optimistic that stocks may see a rebound up to previous highs of about $ 160 in the future.