Thomson Reuters: Getting Cheaper

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When newly merged Thomson Reuters (NYSE: TRI) (Nasdaq: TRIN) reported first-half earnings three months ago, I promised to use objective GAAP accounting numbers to analyze this stock. When these numbers tallied up to $0.51 per share earned through the first half of the year, I observed that "$0.51 may not sound like a lot of profit for a $35 stock [yielding, as it did] a 34 [price-to-earnings ratio] for a company that most analysts don't expect to grow even 13% per year, long-term."

Then I proceeded to give TR the benefit of the doubt. I noted that TR's copious generation of free cash flow made the company look ... not cheap, exactly, but at least less expensive than the GAAP result.

Turns out I was right the first time.

Quit while you're ahead
Over the three months since that column ran, this powerhouse of the financial publishing world, the fount of most every number emanating from McGraw-Hill's (NYSE: MHP) Capital IQ, Yahoo! (Nasdaq: YHOO) Finance, or Microsoft's (Nasdaq: MSFT) MSN Money, has lost some 37% of its value. Despite having one of the steadiest, most recession-impervious business models around, it's underpeformed both the S&P 500 and the Dow and fallen instead in lockstep with the tech-frantic Nasdaq.

In short, I was wrong. TR was too expensive by far. But is it still?

Buy the numbers
Thanks primarily to its acquisition of Reuters, the new and improved TR now boasts year-to-date revenues of $8.3 billion. In the midst of one of the worst recessions in recent memory, it's still earning a 12.1% operating profit margin on those revs. The company has generated $1.2 billion in free cash flow over the past nine months and yielded a free cash flow margin of 14.1%.

To me, that last number alone looks pretty sweet -- much better than TheStreet.com's (Nasdaq: TSCM) 9% FCF margin, although not quite as good as rival Morningstar's (Nasdaq: MORN) 21% .

But it's not good enough for TR, which prefers to talk of free cash flow "after adjusting for one-time cash costs related to the Reuters acquisition and integration-related costs." In that regard, management promises to wind up this year with a … well, let's call it an "adjusted free cash flow yield" of somewhere between 13% and 15% -- essentially the same as it's produced so far.

Valuation
Based on TR's assertion, I'm making an educated guess that real free cash flow this year will resemble the current run rate, or about $1.6 billion. Divided into the company's $18 billion market cap, that gives us a price-to-free cash flow ratio of 11.5. Considering that analysts still expect TR to grow at about 12.5% per year, long-term, the stock now looks attractive.

Is TR the proverbial great company selling for a good price? Yes, I think it finally is.

But do the deep-value sleuths at Motley Fool Inside Value agree? Take a free trial and see.