THOMSON CORP. $41 (Toronto symbol TOC; SI Rating: Above average) provides a wide range of specialized information to financial, medical, legal and scientific professionals, mainly through electronic channels such as the Internet. Unlike Torstar and Transcontinental, Thomson gets only a small portion of its revenue from ads.
In the third quarter of 2005, Thomson earned $0.46 a share (total $302 million) from ongoing operations, down 8.0% from $0.50 ($328 million) a year earlier (all amounts except share price in U.S. dollars).
If you exclude one-time items, Thomson’s per-share earnings grew 8.5%, to $0.51 from $0.47. Revenue grew 9.1%, to $2.4 billion from $2.2 billion.
Thomson continues to expand through acquisitions. In the first nine months of 2005, it spent $248 million on acquisitions, although that’s down 69% from $810 million a year earlier. Fewer new companies to integrate should also give Thomson more time to focus on its core operations.
While growing by acquisition is always riskier than internal growth, most of these purchases are small firms with unique products that expanded Thomson’s presence in certain niche markets. The company’s long-term debt is still a reasonable 0.4 times equity, so it can easily afford these new businesses.
Thomson is also enjoying the benefits of new computer systems, which expand its economies of scale. That lets it sell more information products at the same fixed cost, so a small increase in revenue can have a big effect on profit.
That should also free up cash for stock buybacks and dividends; the current annual rate of $0.80 U.S. yields 2.3%. The stock now trades at a high 25.4 times the $1.39 U.S. a share it will probably earn in 2005.
Thomson is a hold.
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