Lexis+ AI And Protégé Will Drive Future Success In Legal Division

Key Takeaways

• Strategic shift towards AI-enabled tools and generative AI products is set to bolster revenue and margin improvements across divisions.
  
• Strong cash generation, cost management, and capital allocation strategies are enhancing earnings and share value, supporting long-term growth potential.
  
• Revenue and earnings could be impacted by currency fluctuations, declining print revenues, uncertain scientific submission growth, U.S. funding cuts, and rising cloud costs.

Catalysts

Provides information-based analytics and decision tools for professional and business customers in North America, Europe, and internationally.

• The strategic focus on shifting the business mix towards higher growth areas, like AI-enabled analytics and decision tools, is expected to drive continued revenue growth, especially as these tools become an increasing proportion of divisional revenue. This shift is aimed at sustaining strong growth in Risk and improving growth profiles in STM and Legal.
  
• The introduction and scaling of generative AI products, such as Lexis+ AI and Protégé in the Legal division, are anticipated to contribute to stronger revenue and profit growth. These innovations are designed to enhance value offerings and meet customer demands, suggesting potential improvements in net margins as well.
  
• The continued strong cash generation and disciplined cost management efforts, with cash conversion rates at 97% and cost growth being managed below revenue growth, are expected to enhance overall earnings, supported by ongoing share buyback programs that further improve EPS.
  
• The improvement in Exhibitions, expected to maintain higher revenue growth rates and margins than pre-COVID levels, reflects a structurally lower cost base and enhanced digital tools. This anticipated growth should positively impact both the revenue and operating margins.
  
• The strategic emphasis on organic development and selective acquisitions aims to optimize capital allocation and enhance long-term growth prospects, hinting at potential improvements in both revenue and return on invested capital as the business invests in high-value and growth-rich opportunities.

RELX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RELX's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.5% today to 22.9% in 3 years time.
• Analysts expect earnings to reach £2.6 billion (and earnings per share of £1.45) by about February 2028, up from £1.9 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 37.4x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the GB Professional Services industry at 28.8x.
• Analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

RELX Future Earnings Per Share Growth

Risks

• The company's growth might be hindered by fluctuations in currency exchange rates, as demonstrated by the impact of sterling's strength against the dollar and euro, which could affect revenue and earnings in local currency terms.
  
• Print revenues in the STM division are declining faster than historical averages, which could drag down revenue growth if not offset by the adoption of digital solutions.
  
• There is uncertainty regarding the growth rate of scientific article submissions, which, if it normalizes to lower levels, might impact future revenue growth in the STM segment.
  
• Potential governmental funding cuts in the U.S. for research activities could impact the STM division's revenue, given universities' financial difficulties and possible reductions in research spending.
  
• The operating margin improvements might be challenged by rising cloud costs, which could affect net margins if not managed effectively despite the ongoing shift to more efficient cloud infrastructures.

Valuation

• The analysts have a consensus price target of £43.923 for RELX 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 £48.09, and the most bearish reporting a price target of just £36.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £11.5 billion, earnings will come to £2.6 billion, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of £39.06, the analyst price target of £43.92 is 11.1% higher.
  
• 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.