TRI’s bullish pattern is rare in today’s market

January 9, 2019

TRI’s bullish pattern is rare in today’s market

Since September of 2018, virtually every sector in the market has entered correction, or bear market territory. That pattern is still holding true despite the market’s rally since the beginning of the new year, and so it’s pretty rare to find a stock right now that is actually following a bullish trend. Even more rare, it seems is finding a stock in an upward trend over a more than six-month period of time, but still carries an interesting bargain argument.

Enter Thomson Reuters Corp (TRI), a multinational company based in Toronto, Ontario, Canada that has been in existence since the 1850’s. The company deals in news and information services, legal, tax and accounting data. As you’ll see below, the company is a cash flow machine, with healthy operating profits, manageable debt, and a global footprint. Over the last few months, the company has been restructuring its business, with the sale of 55% of its Financial & Risk unit – which offers financial data software and solutions to financial institutions worldwide – to private equity firm Blackstone Group for $20 billion.

The stock did follow the market’s decline in the beginning of December lower, but is only down about 5% from that point and off of 52-week highs above $50 per share. As you’ll see, that pullback is helping the stock actually start forming an interesting bullish pattern that could give bullish traders an interesting opportunity in the short-term. The company’s fundamental strength, meanwhile generally looks pretty solid, with a value proposition that could still make this is a good opportunity to buy a stock with a healthy dividend, even in an uncertain market environment.



Fundamental and Value Profile

Thomson Reuters Corp (Thomson Reuters) is a Canada-based provider of news and information for professional markets. The Company is organized in three business units: Financial & Risk, Legal, and Tax & Accounting. The Financial & Risk unit is a provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. The Legal unit is a provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world. The Tax & Accounting unit is a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government. The Company also operates Reuters, Global Growth Organization (GGO) and Enterprise Technology & Operations (ET&O). Thomson Reuters operates in over 100 countries. TRI’s current market cap is $24.1 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and revenues both declined. This is a trend that has been typical of companies in the Capital Markets industry. TRI operates with a healthy margin profile, however, with Net Income almost 10% of Revenues over the last twelve months. This number also improved to more than 20% in the most recent quarter.
  • Free Cash Flow: TRI’s free cash flow is very healthy, at $2.2 billion over the last twelve month. This number is a little more than double the company’s free cash flow at the beginning of 2017.
  • Debt to Equity: TRI has a debt/equity ratio of .39. Their balance sheet indicates their operating profits are more than adequate to repay their debt. Their balance sheet as of the most recent quarter shows about $507 million in cash and liquid assets against $4.9 billion; operating profits are more than adequate to service that debt.
  • Dividend: TRI pays an annual dividend of $1.53 per share, which translates to a yield of about 3.21% at the stock’s current price. The dividend has actually increased from about $1.38 per share before the fourth quarter of 2018.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $24.60 and translates to a Price/Book ratio of 1.93 at the stock’s current price. Their historical average Price/Book ratio is 2.375. That suggests the stock is undervalued right now by about 22.5%, while the stock Price/Cash Flow ratio is trading almost 27% below its historical average. That gives the stock a long-term target price in the $58 to $60 range.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend since it hit a 52-week low around $36.50 in May; it also informs the Fibonacci retracement lines shown on the right side of the chart. The stock peaked a little above $51 in December and has used the 38.2% retracement line as a support level, rebounding by a couple of dollars per share from that point. That looks like a classic, ABC pullback pattern that usually provides an attractive, short-term trading opportunity for bullish swing traders. A break below support at around $46 per share could see the stock test its next support level around $44, with $42 the next level beyond that. If the stock does break down below the current support, it would mark a new short-term downward trend, which should be taken as a mostly bearish indication.
  • Near-term Keys: The current pattern looks pretty attractive for a short-term bullish trade, either by buying the stock outright or working with call options. In either case, the stock’s peak between $51 and $52 would provide a useful exit point to close the trade. Trying to set up a bearish trade, either by shorting the stock or working with put options is actually very speculative right now; however as I just mentioned, a break below $44 would mark a new downward trend that could act as an interesting bearish trading signal. The stock’s value proposition, along with the fact that its dividend is stable and has increased, offer an interesting reason for long-term investors to think about buying the stock with the plan to hold on for the foreseeable future.