ii view: English language learning tops the class at Pearson

Shares for this education related company are up by more than 50% year-to-date. We assess prospects.

Third-quarter trading update to 30 September

• Underlying sales growth of 7%, up from 6% in the first half
• Full-year guidance unchanged

Chief executive Andy Bird said:

"This has been another good quarter for Pearson and I am pleased with the continuing momentum the business is demonstrating through our sharp focus on delivery. We are executing well on our plan for accelerated margin improvement."

ii round-up:

Education company Pearson (LSE:PSON) today detailed third quarter sales growth of 7%, pushed by demand for its English language learning materials and leaving it on track to meet current City full year profit forecasts. 

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

Cost savings of at least £100 million remain on target during 2023 with underlying quarterly sales up from 6% in the first half and forecast full year adjusted 2022 profit of £416 million potentially up from last year’s £385 million. 

Pearson shares rose by more than 5% in UK trading having come into this latest announcement up by more than 45% year-to-date. Earlier in 2022 Pearson fended off a bid approach from private equity firm Apollo. Shares for fellow media companies WPP (LSE:WPP) and ITV (LSE:ITV) are both down by more than a third year-to-date as investors continue to fret over advertising demand in the face of a global slowdown. 

Sales for Pearson’s English language learning business rose 36% during the quarter. That was followed by sales for its workforce skills business including BTECs, rising by a fifth, with only demand for its higher education business falling 4%. 

Management’s drive to sell to consumers directly as opposed to via schools and colleges, now that learning content can be easily accessed online, has been led by its Pearson+ app. Registered users totalled 4.5 million as of its first-half results, up from 2.75 million at the start of the year.

A £350 million share buyback programme continues with management summarising its financial position as ‘robust’ given low net debt and strong liquidity. 

ii view:

A constituent of the FTSE 100 index, Pearson is focused on courseware materials, assessments and distance-learning services. Its assessment and qualifications business generated its biggest slug of sales during 2021 at just over a third, followed by higher education at almost a quarter. North America accounts for around two-thirds of its sales with management focused on demand for digital learning tools, workforce skills gaps and demand for accreditation and certification.  

• 10 beaten down cyclical shares that could lead a future recovery
• The Week Ahead: Lloyds Bank, Barclays, HSBC, NatWest, Shell, Unilever
• Richard Beddard: can this stock’s transformation help you clean up?

For investors, an uncertain economic outlook including rising interest rates and a consumer cost-of-living crisis cannot be ignored. Pearson’s track record for recovery or transformation programmes is arguably patchy, while the broad move towards learning materials online arguably makes it easier for others to enter and compete. 

More favourably, the previous takeover approach from Apollo could raise interest again if management does not deliver on growth. The pandemic has accelerated Pearson’s existing move online, while potentially rising unemployment could even strengthen demand for its services. 

On balance, and while some caution remains sensible, robust demand and general momentum towards lifelong learning for employees looks to offer grounds for longer term optimism.  

Positives: 

• Pursuing cost savings
• Share buyback programme

Negatives:

• Full-year 2021 revenue only up 1%
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold