ii view: Pearson shares near record low amid school shutdown

Sales fall under lockdown but online business is up. Can it score better marks than last year?

First-quarter trading update

• Revenue declined by 5% versus prior year driven by Covid-19
• Final dividend for 2019 of 13.5p, subject to AGM vote, being paid
• Previously paused the share buyback programme
• Net debt up by 17% to £1.4 billion year-over-year

Chief executive John Fallon said:

"We are in a strong financial position with a healthy balance sheet, low net debt and good liquidity. This enables us to deploy all our people and resources to support our communities as the world's learning moves online at an unprecedented speed and scale. 

"When the threat of the pandemic eventually eases, it will be even clearer that the future of learning is increasingly digital. Through the crisis, we are continuing to invest in the platform, products and services that will make the next generation of digital learning a reality."

ii round-up:

Education publisher and online learning provider Pearson (LSE:PSON) today announced a 5% drop in sales to due Covid-19.

Although in line with its expectations, the closure of schools, assessment centres and higher education bookstores across North America and elsewhere had all impacted. Prolonged lockdowns across its markets could cause an even bigger fall, management admitted.

But the confinement of students and workers globally had helped fuel a 6% increase in sales for its online learning business.

Its shares initially rose by more than 2% in early UK trading, only to fall into negative territory later, trading close to the 420p record low set in 2003.  

Pearson shares are down by more than 30% year-to-date, though less than the 50% falls suffered by media rivals WPP (LSE:WPP) and Informa (LSE:INF). however, that is on top of the 30% drop suffered in 2019 as it was slow in adopting online lower cost study materials and options. 

Measures being taken to fight the impact of Covid-19 include a previously announced suspension of its share buyback programme, cutting director salaries and reducing discretionary spend to a minimum. Staff are not being furloughed but redeployed where possible to help assist with increased online study demand. 

Subject to shareholder approval, the final 2019 dividend payment of 13.5p per share will still be paid in May, with over £1 billion of cash available, including the £530 million recently received from its remaining stake sale in Penguin Random House.  

ii view:

Pearson employs over 20,000 employees in nearly 70 countries. It is currently attempting to execute a transition plan to become a simpler and more efficient business, focused on fewer but bigger opportunities that contribute towards growth and its digital transformation. 

The publisher’s shift to online is progressing. A revenue split of 36% digital (2018: 34%), 30% digitally enabled (2018: 28%) and 34% non-digital (2018: 38%) was achieved in 2019. 

Now, Covid-19, while disrupting its published textbook use in schools and closing testing and assessment centres, is giving its online services something of an added push.

For investors, the wait towards a clear recovery continues. Cost savings and moves online are being pursued. A forward price /earnings (PE) ratio comfortably below the 10-year average suggests some emergence in value following recent share price falls. But, for now, given the degree of uncertainty and persistent downward pressure on the share price, a wait-and-see approach remains most appropriate.

Positives: 

• Cost savings being targeted
• Dividend still being paid

Negatives:

• North American sales, its biggest market, fell 13% in 2019
• Share buyback programme halted

The average rating of stock market analysts:

Hold