ii view: US textbook sales weigh at Pearson

A 30% plus fall in the share price over 2019 and a dividend yield of over 3%. Is now the time to buy?

Full-year results

• Headline revenue down 6% to £3.87 billion
• Adjusted revenue flat year-over-year
• Adjusted operating profit up 6% to £581 million
• Total dividend for 2019 up 5.4% to 19.5p per share 
• Net debt up 25% to £1 billion

2020 Guidance:

• Expects adjusted operating profit of between £410 to £490 million after excluding the sale of its 25% stake in Penguin Random House
• Expects the businesses excluding US Higher Education Courseware to sustain low single digit sales growth in aggregate
• Expects 2019 US Higher Education Courseware trends to continue with heavy declines in print partially offset by modest growth in digital

Chief executive John Fallon said:

"With 76% of the company already growing strongly, and all parts of Pearson profitable, we are a simpler and more efficient company, completely focused on empowering people to progress through a lifetime of learning. The future of learning will be increasingly digital and we have built, by revenue, by far the world's leading digital learning company. We've also built the platform by which we can lead the next generation of digital learning, with an exciting pipeline of new products and services all built around the things that learners care most about - experience, outcomes and affordability. As we benefit from further efficiencies from the investments we have made and deploy our strong balance sheet, Pearson is now well placed, in time, to grow in a profitable and sustainable way."

ii round-up:

Education courseware publisher, Pearson (LSE:PSON), again disappointed investors in these latest results, posting a profit below that estimated only last month. 

Adjusted profit of £581 million for 2019 proved short of management’s January estimate at £590 million, a figure at the bottom end of its September 2019 estimate range of £590 to £640 million. 

The share price fell by more than 4% in early UK trading, compounding a 30% plus fall during 2019 and contrasting starkly with double or even triple digit gains for fellow publishers such as RELX (LSE:REL), Future (LSE:FUTR) and Euromoney Institutional Investor (LSE:ERM) over 2019.

US Higher Education courseware sales dropped by 12% and adjusted profitability for North America by 3%. North America accounts for around two-thirds of total group sales and profit. 

Falling textbook sales in the US offset growth in the rest of the business.

Student assessment sales, including areas such as automated scoring via Artificial Intelligence (AI), rose by 9%, partially offsetting a near 20% decline in total courseware sales year-over-year. 

Guidance or management estimates for 2020, allowing for its recent 25% share stake sale in Penguin Random House, proved in line with its previous forecasts, although the rise in group net debt topped analyst expectations. 

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 move to shift online is progressing. A revenue split of 36% digital (2018: 34%), 30% digitally enabled (2018: 28%) and 34% non-digital (2018: 38%) was achieved. Annualised cost savings of £335 million have now been made, with Incremental restructuring benefits of £60 million expected during 2020. 

Nonetheless, for investors, the wait towards a clear recovery continues. A prospective dividend yield of around 3.5% (not guaranteed) offers some compensation, while a forward price/earnings (PE) ratio below the three and 10-year averages suggests some emergence in value following recent share price falls. But for now, we believe a wait-and-see approach still remains the most appropriate.

Positives: 

• Cost savings being targeted
• Launched a £350 million share buyback programme in January

Negatives:

• Actual North American sales fell by 13%
• Emerging market sales fell by 7% 

The average rating of stock market analysts:

Sell