December 1, 2020 10:02 AM

Thomson Reuters has a good year despite sell-off

Thomson Reuters (TRI) stock dropped and meandered over the summer but has spent the fall rising. Why are investors flocking to this seemingly overbought stock?

/ Published 2 years ago

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2018 has been a good year for Thomson Reuters though at the moment, the stock price has retreated, a clear result of concluding its return of capital transaction that was effective prior to the November 27 price drop. But if one considers the year through November 26, the stock had a good run overall. Big events this year included a $17 billion deal with Blackstone, but that and other positive news don’t fully explain what some consider an overbought condition.

The Motley Fool took a look at the Thomson Reuters Corporation (TSX:TRI, NYSE:TRI) and ended a bit puzzled as to why it has done so well this year. As a company, they point out that around the time of the merger of The Thomson Corporation with Reuters, The Thomson Corporation divested its newspaper division. The combined companies have gone on to pursue strengths in news plus legal and financial data with a very healthy subscription business.

The surprising strength of TRI

On November 26, they closed at $71.52 on the Toronto Stock Exchange, having begun the year at $60.30. The Motley Fool notes that, at its peak, Thomson Reuters traded at a 40 P/E ratio and three times its book value. But they find it hard to justify its falling earnings especially when the company “blamed…lower operating profit and higher income taxes” which did not “sound like temporary conditions” to The Motley Fool.

Thomson Reuters does have solid dividends but The Motley Fool does not expect “aggressive increases” anytime soon. In the end, The Fool shrugs and suggests that Blackstone’s $17 billion deal for a stake in Thomson Reuters’ Financial and Risk business could be a rationale. But if one looks at a year-to-date chart, one sees that the news inspired a leap to $63.19 soon followed by a months-long decline that bottomed at $53.02. So that news seems well-digested.

Recovering from summer doldrums

However, a gradual rise from June till November then began that reached a high of $71.52 on November 26. The biggest clues regarding the gradual increase in price and ongoing positive response from investors are in the headlines and company news. If one looks at Zacks coverage of TRI for the year and also at Thomson Reuters investor relations press releases for the year, one sees a positive narrative unveiled.

Thomson Reuters
Investors love TRI from Toronto to Wall Street (Source)

Almost every quarter via Zacks coverage, there are earnings predictions followed by earnings surprises. And every quarterly report along with regular updates communicated to investors reminds them that a big chunk of the Blackstone investment is going to be distributed to them. If one reads more closely, yes, earnings are decreasing compared to year-ago quarters. And that should be a bigger concern but, perhaps, the fact that growth continues and investors are profiting fueled a nice run.

So what will happen to the stock in the wake of profit taking from the distribution of Blackstone’s investment? As of November 28, TRI stands at $66.46, still a solid increase from the year’s beginning at $60.30. A large chunk of stock was sold by Director Richard Harrison King on November 26 and investors seeking an increased quarterly dividend in December had to be on record November 15, so it is possible current selling pressure is past. If TRI stands firm or even benefits from an end-of-year market boost, then it may still be quite a good year for Thomson Reuters.

(Featured image by Solvency II Wire. CC BY 2.0)

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