Six months ago I looked at Canadian publishing powerhouse Thomson (NYSE:TOC) and concluded that it sold at a discount to the market and paid a better dividend, making the company a "buy." I'm not going to reverse that statement based on the company's results posted last week. (They were nothing less than superb.) But at the company's current price, I think the market is no longer pricing this company at a discount. Here's why:
Thomson's growing strong and steady -- nothing less than we've become used to. Third-quarter revenues rose 9% year-on-year; earnings were up 11% to $0.52 per share. What's more, the company generated 25% more free cash flow than in the year-ago period -- $360 million in cold hard cash (and that's in U.S. dollars, too).
Then there's the long-term view. Revenues also rose 9% against the first nine months of 2003. But this time, earnings increased 18%. And free cash didn't just flow -- it rushed forth in a veritable torrent of green, increasing 38% over the year-ago period to reach $691 million. With numbers like those, if you didn't know that Thomson specializes in publishing case law and financial statements, you could be forgiven for thinking the company was in the business of printing money.
The key to valuing Thomson, though, lies in how it increased earnings and free cash flow so much in just a year's time. Longtime followers of the company will not be surprised to learn that much of the growth came from some pretty astute acquisitions: Thomson bought CCBN and TradeWeb to supplement its Financial division and Biosis for its Scientific & Healthcare division. Consequently, those units produced the bulk of the company's growth this quarter, with EBITDA from the Financial division up 21%, from Scientific & Healthcare up 25%. But growth by acquisition -- however smart the buy -- costs money. Net long-term debt has risen $700 million to $3.7 billion since the beginning of the year, and Thomson now sports an enterprise value (EV) of $26.4 billion. Weigh that against a free-cash-flow run rate of $920 million, and the company's EV/FCF is a hefty 29.
That's a bit of a premium to what the S&P 500 as a whole sells for. And that's OK -- Thomson is a better company than your average S&P 500 large cap. But for the time being, at least, Thomson is no longer an out-and-out bargain.
For more Foolish news & commentary on this legal and financial publishing powerhouse, read:
- Thomson Closes the Books
- Publishers Dueling for No. 1
- Thomson's Patently Good Buy
- Thomson's Book Fair
Fool contributor Rich Smith has no interest, short or long, in Thomson.
