Alastair Reid of Bereneberg earlier this week initiated coverage of Thomson Reuters Corp TRI with a Sell rating and $37 price target under the belief it's hard for the company to "live up to high expectations."
Reid acknowledged Thomson Reuters is very much a "high-quality company" with a "resilient" revenue stream from the high-end corporate market. However, the analyst believes that after a long period of a strong performance in the stock, the risks are now skewed to the downside.
Ironically, the company's biggest rival, the Bloomberg terminal, is also showing signs of a shrinking user base.
Financial & Risk Division
According to Reid, banks across the European Union continue lowering their costs while rising interest rates in the U.S. aren't expected to lead to an increase in bank costs. Meanwhile, banks both in the U.S. and in Europe are experiencing "sluggish" hiring trends, which implies the potential for market share declines for Thomson Reuters' Financial & Risk business.
Legal Division, Tax & Accounting
Reid also highlighted a risk in the company's Legal division as U.S. law firm productivity continues to fall which naturally restricts growth in demand for Thomson Reuters' services.
An improvement in the U.S. business confidence could support growth within Thomson Reuters' Tax & Accounting business. However, this unit happens to be the smallest division and any positive impact won't "dramatically shift the needle at a group level."
Finally, Reid's estimates found that a 1 percent move in organic growth would have a 3 to 5 percent earnings per share impact for Thomas Reuters. But a lower growth trajectory would naturally lead to a lower multiple, especially at a time when the stock's P/E multiple is already trading near a multi-year high.
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