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Stock Report | April 25 | NYS: TRI, TSX: TRI

Thomson Reuters Corp.
Statistics via Source 8
Price
$28.94 (as of 4/25)


Bloomberg
Key Stock Statistics
Market Cap: $23.909 Institutional Ownership (%): 33
Yield (%): 4.43 Dividend Rate/ Share: $1.28
Investment Rationale Officers
- Consistently high dividends - Pres. & CEO: J.C. Smith
- 86% of revenues recurring - EVP & CFO: S. Bello
- Business diversified geographically - EVP & CTO: J.T. Powell
- 90% of revenue generated online - Chairman: D.K. Thomson
- Now clear of merger-related obstacles - V. Chairman: W.G. Beattie
Analysis prepared by Prevatt Corporation analyst Jay Prevatt on April 25, 2012
PC Recommendation: BUY
CORPORATE OVERVIEW

Thomson Reuters (NYSE: TRI, TSX: TRI) was created on April 17, 2008 by the
merger of Thomson Corp. and Reuters Group Plc. It is headquartered in New York,
NY. As of January 1, 2012, the company’s business consists of four segments:
Financial & Risk (about 58% of 2011 revenues), Legal (27%), Tax & Accounting (9%)
and Intellectual Property & Science (7%).
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Thomson Reuters provides news, intelligent information and services to businesses,
government institutions, hedge funds, banks, administrators, traders and other
professionals worldwide, conducting business in 93 countries.
2
The company’s
information expertise covers the financial, legal, tax and accounting, healthcare,
science and media markets.
2

EXECUTIVE SUMMARY

Thomson Reuters has had a tumultuous year amid management shakeups, corporate
restructuring and the final phases of its 2008 merger. But the company will come
out of this period poised to make consistent gains.

The traditional business model for Thomson Reuters consisted of two divisions:
Markets and Professional Services. That model changed this year, splitting into the
four prenominate branches, with many smaller, nimbler subdivisions being housed
under one corporate umbrella.
2
The process of splitting its divisions and completing
a full structural overhaul cost money and time – $50M over the course of Q4 2011 –
which has served to hamper operating margins, especially in the Legal and Market
subdivisions.
2
Ill-fated was the launch timing of the company’s Eikon system, a
subscription-modeled business and market-information terminal that put the
company in direct competition with Bloomberg during its time of restructuring.
Amid the bustle of the overhaul, Eikon critically underperformed, but should show
growth with further investment and company stability. The most significant scar on
the company’s 2011 financials was a one-time $3B non-cash goodwill charge, listed
as an “unusual expense” on its income statement, which was paid as a legacy cost in
the final stages of the merger. In sum, these factors caused the company to report a
$1.38B operating loss for the 2011 financial year.
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But these figures have, in our opinion, contributed to the undervaluation of the
company and hidden the fact that Thomson Reuters is now more competitive than
ever. All indicators, omitting one-time charges and restructuring costs, point
towards stability and growth through investment in the company’s core market
information business and smart investment and divestment tactics.

“This is the last time you will hear us utter the word integration” said new CEO
James Smith in a recent Earnings Call regarding Q4 2011 results (p. 1).
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“Our core
Professional businesses continue to deliver,” he elaborated, “we are making real
progress in fixing the execution issues in some critical areas of our Markets business,
and we're getting our product pipeline, including Eikon, back on track (p. 1).”
6

The company’s EBITDA, not including the amortization cost of the $3B goodwill
charge, was $3.55B in 2011, a 10.9% increase over 2010’s figure.
7
Q4 of 2011 saw a
26% increase in EBITDA over Q3 – or a 33% increase when excluding restructuring
costs.
7


Other encouraging figures abound. While many news outlets struggle to transition
their revenue streams from traditional to digital models, Thomson Reuters was able
to generate approximately 90% of its 2011 revenues from electronically delivered
products.
8
Also giving the firm an edge is its geographic diversification, with 58% of
2011 revenues derived from American markets, 30% derived from European, Middle
Eastern and African markets, and 12% derived from Asian markets.
8
Even better,
86% of revenues were recurring, indicating a highly loyal consumer base.
8


RECENT INVESTMENTS / DIVESTMENTS

TRI SELLS HEALTHCARE BUSINESS FOR $1.25 BILLION (Lee & Banerjee; Lamar)
Following up on its announcement last year of plans to sell its healthcare information
division, Thompson Reuters Corp. agreed to sell the business for 1.25 billion in cash
to Veritas Capital earlier this week. The business provides data and services to
health-care businesses and industry professionals. The deal will finalize in the
coming months, barring approval from regulators, and was struck at a higher price-
point than originally anticipated.

This divestment was a smart decision, as the healthcare division saw some of the
lowest margins and was one of the least globalized divisions within the company,
according to articles at Bloomberg and the Wall Street Journal. By shedding it for
cash, Reuters will be able to reinvest in its more profitable and more central services.



TRI ACQUIRES REDEGG (Diaz)

Reuters acquired Redegg, a provider of media information solutions for public
relations and marketing professionals, in February of this year. The terms of the
agreement were undisclosed.

An investment in RedEgg will likely prove to be wise,
given the current rise in demand for public relations professionals.

OTHER DIVESTMENTS

Thomson Reuters agreed to sell its ONESOURCE Indirect Tax Managed Services
business to KPMG LLP in February after it retrieved negative net sales for 2011.
5
It
also agreed to sell its Corporation Trade and Risk Management business to Vista
Equity Partners during that month.
5
The terms of agreement were not disclosed for
either of these transactions. In March, the company agreed to sell its PORTIA
financial-management software to SS&C Technologies Holdings Inc. for $170M
(Lamar, p. 1).

Each of these divestments is awaiting regulatory approval in the second quarter; the
company has plans to trim several other small businesses within its legal services
division (Lee & Banerjee, p. 1). These divestments were made in effort to shuck low-
profit-margin ventures and buckle down on its core businesses – let go of the dogs
and milk the cows.

CURRENT MARKET AND COMPETITIVE OVERVIEW

COMPETITORS
The privately-owned Bloomberg L.P. is Thomson Reuters’ longtime rival, competing
directly with the company in both the news syndication and the business intelligence
industries. Thomson Reuters always maintained a comfortable market lead – 36% to
26% at the time of its 2007 merger (see Appendix 1). However, Bloomberg was able
to whittle that away while Reuters was occupied with merger activities, making
history in February by seizing the market lead, claiming 30.44% to Thomson Reuters'
30.05% over the 2011 business year (Flamm, p. 1).

While competition with Bloomberg is fierce, other companies in the market aren’t
sizable enough to be competitive with Thomson Reuters (see Appendix 2). With an
eightfold size advantage over competing publishers, excluding Bloomberg,
economies of scale are likely to be working in the firm’s favor (“Screen Test,” p. 1).

McGraw Hill represents one upcoming threat, at about half of Reuters’ market cap.
Its recent acquisition of a market information firm and subsequent split into
Education and Financial divisions put it in direct competition with Thomson
Reuters. Time will tell whether the new company will pose a significant threat.

NEWS SYNDICATION INDUSTRY
The news industry has suffered from many woes over the past decade, struggling to
effectively navigate the environment of creative destruction inherent in media
industries. With profits waning in recent years and traditionally strong physical
news companies such as the New York Times downsizing (some even exiting the
market), the companies that stand to gain are the ones that have successfully
transferred to an online business model. Thomson Reuters has been a leader in this
area, with 90% of its 2011 revenues stemming from online services.
8
The company
has also made investments to its online infrastructure, recently partnering with
Elektron Services to improve its network infrastructure in Asia (“Thomson Reuters
Commits…,” p. 1).

Thomson Reuters’ US News Operations generated about $98 Million in 2011, an
increase of 4.7% over 2010, and currently holds 4% market share over the news
syndicate industry.
4
With physical news on the decline, the company has plenty of
room for organic growth in this field. Competition will be fierce with Bloomberg,
which holds 8% market share.
4


BUSINESS INTELLIGENCE INDUSTRY
The Business Intelligence market has seen significant growth in recent years, valued
at around $8.4B in 2008, and is forecasted to grow even more, to $13B by 2013.
3

Driving the demand for business intelligence are soaring corporate profits. In a
Business Insights survey, 78.1% of organizations reported using business information
tools.
3
The report elaborates:
“Of those organizations which do not currently use BI [Business Information]
tools, the biggest barriers to uptake are cost and complexity, a lack of mining
capabilities for unstructured data such as text…and lack of understanding of
available BI services among the mid-market users are major stumbling blocks for
wider adoption of BI (p. 10).”
3

Thomson Reuters is in a position to solve these industry problems and reap the
benefits.

The company has already tackled the challenge of mining text, unveiling an industry-
leading social media sentiment analysis feature as part of its information packages.
The new system will have the capability of analyzing 50,000 news sites and 4 million
social networking sites – approximately one zetabyte of information (Groenfeldt, p.
1). This service far outpaces competitors in terms of raw data analyzed, offering over
90 analysis metrics to boot (Groenfeldt, p. 1). The company has also made recent
and significant improvements to other analysis tools, such as its credit risk model
(Lamar, p. 1).

Having recently made liquid its healthcare division, the company should reinvest its
spare cash in its market tools, the cornerstone of its business with over 400,000
customers (“Screen Test,” p. 1). Spending should include heavy investment in the
Eikon system in order to outperform Bloomberg’s signature terminals and win back
market share. Particular areas of focus should be the user interface and research on
an effective price point – a mid-range option that undercuts Bloomberg’s notoriously
pricey subscriptions could win over an entirely new market. This could even prove to
be necessary, as Bloomberg’s total terminal subscribers leads Eikon’s by a whopping
300,000 to 8,000 (“Screen Test,” p. 1).

OVERVIEW OF RISKS

The Eikon terminal’s lackluster debut raises concern about market demand for a
Bloomberg competitor. While it is Prevatt Corporation’s opinion that the terminal
stuttered due to poor timing, there exists a real possibility that the market simply
won’t be receptive. It will be necessary to mitigate this risk by differentiating the
Eikon product from Bloomberg both in price-point and features offered.

Geographic diversification, for all of its benefits, also presents inherent risk of
regional failure. By setting up a “corporate-umbrella” model Thomson Reuters has
created a system where foreign businesses can work efficiently in their respective
markets, but new market penetration is always a volatile venture.

The chief risk of an investment in Thomson Reuters is the potential competition of
Bloomberg. It is the opinion of the Prevatt Corporation that Thomson Reuters will
be able to remain competitive and grow over the coming months and years, but there
is potential for Bloomberg to thwart the firm’s efforts.

CONCLUSION

Thanks to an enviable set of assets and a business model designed to weather
creative destruction, Thomson Reuters Corp. is on the brink of emerging from its
chaotic recent history and receiving a long-awaited payoff for its restructuring
efforts. If it continues to invest in its online news delivery, global business initiatives
and Eikon terminals, it is the opinion of Prevatt Corporation that the company will
reemerge as a market leader. Account for the company’s consistently high dividends
and this stock becomes a definite BUY.

APPENDIX

1. via the Economist

2. Generated by NetAdvantage
*Bloomberg, a private company, doesn’t appear here



SOURCES
Financial and Other
1. JP Morgan, “New CEO Resets The Bar - Lowering Estimates; Turnaround
Plan Seems Logical, But It Will Take Time To Show Up In Numbers,” via
Bloomberg Terminal
2. 2011 Annual Report, via http://ar.thomsonreuters.com/home.html
3. “The Business Intelligence Market Outlook” by Suvradeep Bhattacharjee,
retrieved via Datamonitor 360
4. News Syndicates in the US Industry Report, Retrieved via IbisWorld
5. Recent Developments for TRI retrieved via Factiva
6. “Thomson Reuters' CEO Discusses Q4 2011 Results - Earnings Call
Transcript” via SeekingAlpha.com: http://seekingalpha.com/article/354761-
thomson-reuters-ceo-discusses-q4-2011-results-earnings-call-transcript
7. Income Statement, Balance Sheet and Cash Flow retrieved via MarketWatch:
http://www.marketwatch.com/investing/stock/tri/financials
8. Standard & Poor’s TRI Report, retrieved via Factiva

News Sources

Diaz, Yvonne. "Thomson Reuters Acquires RedEgg." Press Release from Thomson Reuters:
http://thomsonreuters.com/content/press_room/financial/2012_13_02_thomson_reuters_acquires
_media_intelligence_provider_redegg

Flamm, Mattheew. "Bloomberg LP Beats Thomson Reuters." Crain's New York Business.
http://www.crainsnewyork.com/article/20120223/MEDIA_ENTERTAINMENT/120229958

Groenfeldt, Tom. "Thomson Reuters Gets More Sentimental With News and Social." Forbes.
http://www.forbes.com/sites/tomgroenfeldt/2012/03/08/thomson-reuters-gets-more-sentimental-
with-news-and-social/

Lee, Edmund, and Devin Banerjee. "Thomson Reuters to Sell Health-Care Unit for $1.25 Billion."
Bloomberg. http://www.bloomberg.com/news/2012-04-23/thomson-reuters-to-sell-health-care-
unit-for-1-25-billion-1-.html

Lamar, Mia. "Thomson Reuters To Sell Healthcare Business To Veritas Capital For $1.25 Billion."
Wall Street Journal. http://online.wsj.com/article/BT-CO-20120423-709557.html

Lamar, Mia. "SS&C Tech To Pay $170 Million For Thomson Reuters's Portia Business." Wall Street
Journal. http://online.wsj.com/article/BT-CO-20120229-709590.html

"Screen Test." The Economist. http://www.economist.com/node/21541413

"The McGraw-Hill Companies: Earnings Preview.” Seekingalpha.com.
http://seekingalpha.com/article/520411-the-mcgraw-hill-companies-earnings-preview

"Thomson Reuters Commits to Elektron Services in HKEx Co-Location Facility." FX-MM Magazine.
http://www.fx-mm.com/13819/news/thomson-reuters-commits-to-elektron-services-in-hong-kong-
stock-exchange-co-location-facility/

Brewster, Lemuel and Clare Arber. “Thomson Reuters launches new forward-looking model to assess
credit risk.” Press Release from Thomson Reuters.
http://www.reuters.com/article/2012/04/16/idUS126934+16-Apr-2012+HUG20120416