Interactive Investor

ii view: Pearson shares hit five-year high on AI and buybacks

An education company helping workers retrain and which is looking at artificial intelligence to drive the business. We assess prospects.

1st March 2024 15:30

Keith Bowman from interactive investor

Full-year results to 31 December

  • Reported revenues down 4% to £3.7 billion
  • Adjusted operating profit up 31% to £573 million
  • Final dividend of 15.7p
  • Total 2023 dividend up 6% to 22.7p
  • New £200 million share buyback programme

Chief executive Omar Abbosh said:

"2023 was another year of strong operational and financial performance, with results surpassing initial expectations once again, driven by our Assessment & Qualifications and English Language Learning businesses. Our consistently strong cash generation has sustained investment to support our future growth and deliver ongoing value for shareholders.
 
"Pearson is a strong company with excellent market potential, people committed to our mission, and a purpose that genuinely helps communities. We have an exciting future ahead of us."

ii round-up:

Pearson (LSE:PSON) today detailed a new £200 million share buyback programme, with the education materials provider confident of hitting its 2025 profit margin target of between 16% and 17%, up from 15.6% in 2023.

Demand for its courses including those for English Language learning drove adjusted sales stripped of business disposals up 5%, aiding a near one-third increase in adjusted operating profit to £573 million.  

Shares in the FTSE 100 company rose 5% in UK trading having come into this latest news up by 3% over the last year. That’s similar to data and publishing company GlobalData (LSE:DATA) and in contrast to a 3% fall for the FTSE 100 index.
 
Pearson operates across five core divisions and promotes itself as the world's leading learning company, serving customers with digital content, assessments, qualifications, and data.

Adjusted sales and profit for 2024 are expected to grow in line with current City forecasts, with the relatively new head and former Microsoft executive again expressing optimism about future opportunities which artificial intelligence (AI) can bring. 

Improved year-over-year trading helped 2023 free cash flow hit £387 million versus £222 million in 2022, aiding a 6% increase in the total 2023 dividend to 22.7p per share. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Pearson shares post the results. A first-quarter trading update is likely late April or early May. 

ii view:

Started as a construction company in 1844, Pearson today employs around 20,000 people. Its Assessment & Qualifications division generated its biggest slug of profit in 2023 at around three-fifths, followed by Higher Education at a fifth, Virtual Learning and English Language Learning each at around a tenth, and Workforce skills a small loss. Management focus includes growing its digital sales, focusing on costs, and reshaping its business portfolio.

For investors, Higher Education sales 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 for students, while an estimated forward price/earnings (PE) ratio at close to the 10-year average suggests the shares are not obviously cheap.

More favourably, the new chief executive is further reinvigorating the company’s strategy, with AI now in the mix. Demand for IT and healthcare learning materials continues to assist its A&Q division. A focus on cost savings persists, 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 require reskilling by 2030.  

At just above the £10 level, Pearson shares currently trade at what has, historically, been a level of resistance. However, a break above this price would be considered a bullish signal. An analyst consensus fair value estimate above £11 per share implies that the City thinks the new tech-savvy CEO can do it. 

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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