Interactive Investor

ii view: education firm Pearson starts life under new CEO

Injecting artificial intelligence into its products and with a former Microsoft executive now at the helm. Buy, sell, or hold?

17th January 2024 14:58

Keith Bowman from interactive investor

Full-year trading update to 31 December

  • Adjusted revenue up 5% year-over-year
  • Cost savings of £120 million achieved

Guidance:

  • Expects full-year 2023 adjusted operating profit of between £570 million and £575 million, up from 2022’s £456 million

Chief executive Omar Abbosh said:

“Pearson saw strong strategic and operational progress in 2023 leading to financial performance ahead of our initial expectations. The Group is well positioned to seize growth opportunities and deliver long-term future value for all of our stakeholders. I look forward to leading the next phase in Pearson's ongoing evolution."

ii round-up:

Education materials provider Pearson (LSE:PSON) today detailed annual sales at the upper end of City estimates as demand for its courses including those for English Language learning remained strong. 

Adjusted full-year 2023 sales growth of 5% beat analyst estimates of 4% but with expected operating profit of up to £575 million marginally missing City forecasts given currency headwinds. 

Shares in the FTSE 100 company fell around 2% in UK trading having come into this latest news up by almost 5% over the last month. That’s similar to media sector giant RELX (LSE:REL) and better than a near 1% fall for the FTSE 100 index itself during that time. 

Pearson operates across five core divisions and highlights itself as the world's leading learning company, serving customers with digital content, assessments, qualifications, and data.

English Language Learning sales rose by close to a third compared with 2022, with sales for its Assessments and Qualifications (A&Q) business, generating just over half of all profits, climbing 7%. 

Sales at its Workforce Skills division gained by just over a tenth, helping offset falling sales at its Higher Education and Virtual Learning businesses, hindered by factors including the previously confirmed loss of its contract with Arizona State University.  

A cost saving programme under the recently departed chief executive Andy Bird delivered £120 million of savings with the group’s balance sheet flagged as ‘strong’ given net debt of £0.8 billion. 

Broker UBS reiterated its ‘buy’ rating on the shares post the update. Full-year results are scheduled for 1 March with its new head, formerly of Microsoft Corp (NASDAQ:MSFT), due to outline a strategy update at it July interim results. 

ii view:

Started as a construction company in 1844, Pearson today generates most of its sales in the USA at around 70%, followed by the UK at around a tenth. It’s A&Q division generates its biggest slug of revenues at just over a third, followed by Higher Education and Virtual Learning at around a fifth each, and English Language and Workforce Skills both below a tenth each. Strategic focuses have to date included growing its digital related sales, focusing down on costs, and reshaping its business portfolio.

For investors, sales at its Higher Education business fell 3% year-over-year, hindered by competition from non-mainstream publishers. Pearson’s broad move towards learning materials online arguably makes it easier for others to enter and compete. College costs mixed with a cost-of-living crisis make for a tough backdrop, while an estimated forward price/earnings (PE) ratio at close to the 10-year average may suggest the shares are not obviously cheap.  

On the upside, a push to deploy artificial intelligence, or AI across its products is ongoing, and demand for IT and healthcare learning materials continues to assist its A&Q division. Costs savings remain a high management focus, while its Work Skills division has been reshaped as it attempts to assist the one billion people estimated by the World Economic forum that will need reskilling by 2030.  

For now, and despite continued risks, the utilisation of AI and an analyst consensus estimate of fair value at over £11 per share should underpin the investment case.

Positives: 

  • Diversity of business divisions
  • New chief executive

Negatives:

  • Uncertain economic outlook
  • Currency movements can hinder performance

The average rating of stock market analysts:

Buy

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