ii view: learning group Pearson makes strong start to 2022

Having recently rebuffed a takeover, the spotlight falls on management to prove its worth. Buy, sell, or hold? 

First-quarter trading update to 31 March

• Underlying sales growth of 7%

Chief executive Andy Bird said:

"We remain sharply focused on the successful execution of our strategy and we are encouraged by the momentum we are seeing across the business."

ii round-up:

Education company Pearson (LSE:PSON) today flagged a strong start to its new financial year as it maintained its full-year profit estimate. 

First-quarter sales rose 7%, buoyed by double-digit growth for both its assessment & qualifications and English language learning businesses. That beat City estimates of nearer to 4%. 

Pearson shares rose by more than 2% in UK trading, leaving them up by close to 30% year-to-date. Earlier this year Pearson fended off a bid approach from private equity firm Apollo. Shares for TV advertiser ITV (LSE:ITV) are down by around a third during 2022, while media sector giant and scientific publisher RELX (LSE:REL) is little changed. 

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Pearson’s direct-to-consumer push is being fronted by its Pearson+ app, which had 2.75 million registered users at the end of 2021. Management is looking to sell more directly to consumers now that learning content can be easily accessed online.

The company, which began as a construction company, strengthened its direct-to-consumer strategy during the period with the acquisition of Mondly, adding to its English language learning division. 

Sales for its Workforce Skills and Virtual Learning divisions grew by 9% and 3% during three months to the end of March. Sales for Higher Education fell by 5%.

ii view:

A constituent of the FTSE 100 index, Pearson employs over 20,000 people. Most of its sales come from North America. Chief executive Andy Bird, who joined back in October 2020, is attempting to focus on demand for digital learning tools, workforce skills gaps and demand for accreditation and certification. 

For investors, the education company’s record for transformations is arguably patchy, pandemic and economic uncertainty persist, while the broad move of learning materials online arguably makes it easier for others to enter the market and compete. 

On the upside, the recent approach from Apollo could raise interest in future if management does not deliver on growth. The pandemic has also accelerated the company’s existing move online and previous business disposals have helped lower debt. A £350 million share buyback programme is also now underway, while the shares currently sit on an estimated future dividend yield of around 2.8%. That's not bad in an era of still low interest rates. In all, and while some caution looks sensible, room for longer-term optimism does appear to have grown. 

Positives: 

• Cost savings programme ongoing
• Relatively attractive dividend (not guaranteed)

Negatives:

• Full-year 2021 revenue only up 1%
• Pandemic and economic outlook uncertainty

The average rating of stock market analysts:

Strong hold