ii view: Pearson shares dive after latest trading update

Pearson shares plummeted 19% on this news. Is the pace of its digitisation shift too slow?

Nine-month trading update

• Expect nine-month group underlying revenue to be broadly flat
• US higher education courseware (25% of revenue) down by around 10%
• Simplification plans on track and strong balance sheet

Guidance:

• Still expect full-year revenue to stabilise this year
• Adjusted operating profit to be at bottom of guided range of £590 million to £640 million

Chief executive John Fallon said:

"The third quarter has been significantly weaker than we expected in US Higher Education Courseware. Whilst difficult in the short term this places more importance on our work to remake this part of Pearson and we are exploring new ways of deploying our new technology platform so that we can offer students highly affordable, convenient, adaptive, digital courseware. We still expect revenue across Pearson as a whole to stabilise this year, with encouraging growth in many parts of the company."

ii round-up:

Education company Pearson (LSE:PSON) issued what investors interpreted as a profit warning for this latest trading update. 

The group reported a 10% reduction in US higher education courseware sales during what is the key selling season. 

Despite the company's own push to move away from printed text books to offering material on line, the speed at which demand had been shifting was faster than what management had been expecting.   

Pearson, which employs over 20,000 employees in nearly 70 countries, is in the midst of a transition plan to become a simpler and more efficient business, focused on fewer bigger opportunities that contribute towards growth and its digital transformation.

The US market accounts for around two-thirds of group sales, with the US higher education courseware business generating around a quarter of total revenues. 

Better performances were seen elsewhere across the company such as in professional certification and English academic, with the result that full year revenues are still expected to stabilise.

The shares fell 19% in early UK stock market trading.

ii view:

Investor trust is hard won and quickly lost. Following this latest update, management's battle to rebuild investor faith has clearly taken a step backwards. A hit to sales and a move down the company's prior profit guidance range is very unfortunate. 

Pearson's move to shift on line is progressing – the digital print split is expected to shift from 55%: 45% at the end of last year to 65%: 35% at the end of this year. Annualised cost savings of £330 million are in the group's cross sights, with a strong balance sheet being underlined. 

Nonetheless, for investors, the wait for a clear and obvious recovery continues. A prospective dividend yield of just over 2% offers little compensation, while a forward price/earnings (PE) ratio above the three-year average does not suggest the shares are obviously cheap. For now, a wait-and-see approach may be most appropriate course of action. 

Positives: 

• Cost savings being targeted
• US K12 courseware business previously sold
• Improving balance sheet

Negatives:

• Full-year profit guidance lowered
• Reported H1 sales declined by 2% and by 9% over 2018
• H1 emerging market sales fell by 16% 

The average rating of stock market analysts:

Weak hold