Interactive Investor

ii view: education provider Pearson aims high this year

Injecting artificial intelligence into its products and with a new chief executive to start soon. Buy, sell, or hold?

30th October 2023 15:21

by Keith Bowman from interactive investor

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Nine-month trading update to 30 September

  • Total revenue up 2% year-over-year
  • On track to achieve £120 million of cost efficiencies in 2023

Guidance:

  • Now expects full-year sales, excluding a previously announced business disposal, to grow at the upper end of its prior low to mid-single digit range
  • Now expects full-year profit to be to be £20 million better than previously forecast at between £570 million to £575 million

Chief executive Andy Bird said:

"This third quarter performance illustrates the continuing momentum across our businesses, led by Pearson VUE and Pearson Test of English. Our Higher Education business reported as expected and remains on plan to return to growth next year. We've received positive initial feedback from our Generative AI tools and are evolving our AI capabilities to create further opportunities to maximise the potential of our trusted, proprietary content and data sets. 

“Pearson is well positioned for the next stage of its growth and development and poised to take advantage of long-term future opportunities."

ii round-up:

Education materials provider Pearson (LSE:PSON) today raised its sales and profit expectations given robust demand for its Assessments and Qualifications (A&Q) business and a continued focus on cost cutting.  

Full-year sales, excluding a previously announced business disposal, are now expected to come in at the upper end of its prior low to mid-single digit range, with profit now expected to be £20 million better than previously forecast at between £570 million and £575 million.

Shares in the FTSE 100 company rose by more than 2% in UK trading having come into this latest news down by less than 5% year-to-date. That’s better than the 10%-plus falls for ad related businesses WPP (LSE:WPP) and ITV (LSE:ITV), although in contrast to a near one-quarter gain for specialist data provider RELX (LSE:REL)

Pearson operates across five core divisions including A&Q, its biggest profit generator at just over half of all profits and English Language Learning accounting for under a tenth of overall profits.

Adjusted sales for its A&Q division rose 11% during the final third quarter, with English Language related demand climbing by just over a fifth. Sales for both Higher Education and Virtual Learning each retreated, hindered by factors including the previously confirmed loss of its contract with Arizona State University. 

Pending new chief executive Omar Abbosh from Microsoft is set to takeover on 8 January. A total of £185 million of its previously announced £300 million share buyback programme is yet to be executed. 

Broker UBS reiterated its ‘buy’ stance following the news. A full-year trading update is likely to announced mid-January.

ii view:

Pearson describes itself as the world’s leading learning company. The FTSE 100 company is focused on courseware materials, assessments, and distance-learning services. Employing over 20,000 people, the US remains by far its biggest market accounting for almost 70% of sales, followed by the UK at around a tenth. Strategic focuses include growing its digital related sales, focusing down on costs and reshaping its business portfolio.

For investors, headline sales at its Higher Education division continued to fall, with robust employment and new job creation in the US a potential factor. College costs mixed with a cost-of-living crisis make for a tough backdrop, while Pearson’s broad move towards learning materials online arguably makes it easier for others to enter and compete.

On the upside, a push to further deploy artificial intelligence (AI) across its products is ongoing, and demand for IT and healthcare learning continues to assist A&Q. Costs continue to be axed, with management on track to cut a further £120 million during 2023, while Its Work Skills business has been reshaped as it attempts to assist the one billion people estimated by the World Economic forum that will require reskilling by 2030. 

In all, and while some caution remains sensible, the utilisation of AI and an analyst consensus estimate of fair value sat at over £10.50 per share arguably gives grounds for ongoing longer-term optimism.

Positives: 

  • Pursuing cost savings
  • Diversity of business divisions

Negatives:

  • Uncertain economic outlook
  • Currency movements can hinder performance

The average rating of stock market analysts:

Buy

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