Four months ago, financial news powerhouse Thomson Reuters (NYSE:TRI) completed its merger of two very famous names. Now that these great tastes are together, let's delve into the second-quarter earnings report (released yesterday) and see if they taste great together.

But first, a caveat: This is not going to be an easy task. As a recently merged entity, Thomson Reuters (TR) leans heavily upon "pro forma" accounting of its results, and will probably continue to do so throughout at least the first year of its existence.

Regardless, in analyzing the results (today and in the future), I'm going to stick as much as possible to the GAAP numbers. Not because I don't trust TR, mind you. Heck, I depend on the company's various divisions to provide accurate data to any number of data sources I use -- McGraw-Hill's (NYSE:MHP) Capital IQ subsidiary, Yahoo! (NASDAQ:YHOO) Finance, and Microsoft's (NASDAQ:MSFT) MSN, to name just a few. It's just that I prefer to use objective numbers when analyzing companies. As perhaps the world leader in providing objective numbers, I trust TR will understand. With that said, here are TR's numbers for the first half of 2008:

  • Sales grew 43%, clocking in at nearly $5 billion.
  • TR earned a 10.3% operating margin and a 7.4% net margin on these revenues.
  • Which worked out to $0.51 per share, diluted.

Now, $0.51 may not sound like a lot of profit for a $35 stock. If you run-rate that out through the end of the year, you'll find yourself staring at a 34 P/E for a company that most analysts don't expect to grow even 13% per year, long term.

The valuation is actually a bit better than that, though. You see, TR is a veritable cash machine, generating $824 million in cash profits over the past six months -- more than twice its net income. Run-rate the free cash flow out six months, and the stock comes back with a much more reasonable price-to-free cash flow ratio of 18.

But even that number is a little rich for my taste, and the reason has only partially to do with the probable growth rate. There's also the fact that TR carries more than $7 billion in net debt. Basically, I just don't see a very big margin of safety in the stock right now, so I'll be sitting on the sidelines for the time being, waiting for TR's price to come down to something a bit more reasonable.

Unlike Rich, the deep-value sleuths at Motley Fool Inside Value do see value in Thomson Reuters. For a counter to Rich's argument, pick up your free trial to Inside Value right here.

Fool contributor Rich Smith does not own shares of any company named above. Thomson Reuters and The McGraw-Hill Companies are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.