Takeover ill-timed says analyst, but upgrades TR shares

"In retrospect, Thomson's acquisition of Reuters was ill-timed. Thomson ‘doubled-down’ on the financial services industry at a time when industry dynamics were rapidly deteriorating, translating into significant pressure on revenues and earnings,” Piper Jaffray’s analyst said.

“That said, execution has been solid, with cost efficiencies beating expectations and translating into an upward bias in estimates despite the challenging industry backdrop...We like Thomson Reuters' leadership position in the global information service market, its strong record of execution and its appealing business model. With the worst of the financial industry downcycle likely behind us, we are upgrading our rating on Thomson to Neutral."

Deutsche Bank upgraded Thomson Reuters from Sell to Buy nine days ago and said that with two consecutive quarters of net sales in the markets division the mechanics of the subscription model means a negative Q3 figure is a given, and probably so for the first half of 2010.

Margins in Legal were guided to fall modestly, breaking a long pattern of growth, and the company was flagging slower revenue growth in Legal in the second half, it said. “The company is sounding a cautious note, but in fact the trough now looks sooner and shallower than we expected. But also a shallower trough and stronger turn; consensus too low.

“All the above is rather grim and the last year has seen management gradually back away from the view that TR could get through this slump without revenues falling. That said, we now expect the trough in Markets to be shallower / shorter than we thought likely in late 2008...”

Goldman Sachs initiated its analyst coverage on Thomson Reuters with a Neutral rating and $38.30 price target following the unification of the dual listing. It said that while Thomson Reuters is one of the strongest international professional publishing companies it trades at a 35 per cent premium to most peers. ■