Integration Challenges With SafeSend And Materia Will Hurt Profits

Key Takeaways

• Significant AI investments and recent acquisitions must deliver revenue growth soon to avoid negative impacts on profitability and net margins.
  
• Revenue stability concerns arise from divestitures, incentive compensation, and tough year-over-year comparisons affecting future growth expectations.
  
• Thomson Reuters' strong financial performance, AI investment, and strategic resource management suggest potential revenue growth and competitive strength in the legal and tax sectors.

Catalysts

Engages in the provision of business information services in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• Significant investments in AI, expected to continue at a pace of over $200 million annually, may weigh on net margins and profitability if these investments do not translate into commensurate revenue growth and efficiencies soon.
  
• The recent acquisitions, including SafeSend and Materia, require successful integration and scaling. Any unforeseen challenges here could impact short-term earnings and profitability.
  
• The sale of FindLaw and additional divestitures might result in a revenue dip, noted as a factor in the projected 2025 revenue being below organic growth rates, potentially affecting future revenue streams.
  
• Potential continued higher incentive compensation linked to strong 2024 performance could exert pressure on net margins in 2025, if not balanced with proportional revenue growth.
  
• The tough comparison in 2025 due to unusually high AI transactional content revenue in 2024 will likely exert downward pressure on year-over-year revenue growth, potentially affecting expectations around revenue stability.

Thomson Reuters Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Thomson Reuters's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.2% today to 23.5% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $4.6) by about February 2028, down from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.6x on those 2028 earnings, up from 36.3x today. This future PE is greater than the current PE for the US Professional Services industry at 32.1x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

Thomson Reuters Future Earnings Per Share Growth

Risks

• Thomson Reuters showed continued strong financial performance in 2024, meeting or exceeding key financial targets, with a 7% growth in full year organic revenue and $1.8 billion in free cash flow. These results indicate potentially stable or increasing revenue in the future.
  
• The company is seeing strong demand and double-digit revenue growth in multiple products and regions, aided by the uptake of generative AI solutions such as Westlaw Precision and CoCounsel. This could lead to increased revenue and earnings through enhanced product offerings.
  
• Thomson Reuters remains optimistic about its medium-term growth potential, with projected organic revenue growth of 7% to 7.5% in 2025 and increased targets for the Big 3 segments, which suggests potential revenue and earnings growth.
  
• Continued investment in AI, with over $200 million invested in 2024 and plans to maintain this pace, indicates a commitment to innovation that could support revenue growth and competitive positioning in the legal and tax sectors.
  
• The company maintains significant capital capacity and liquidity with strategic acquisitions enhancing its portfolio, while also planning to repurchase shares and increase dividends, reflecting strong management of financial resources and potentially stable or improved profit margins.

Valuation

• The analysts have a consensus price target of CA$251.803 for Thomson Reuters based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$285.62, and the most bearish reporting a price target of just CA$194.66.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.7 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 45.6x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of CA$252.31, the analyst price target of CA$251.8 is 0.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.