ii view: why educator Pearson is bottom of the class

A new CEO, new strategy and a push toward online learning, but a plunging share price. Buy, sell or hold?

Nine-month trading update to 30 September

• Underlying sales up 10% year-over-year

Chief executive Andy Bird said:

"We are encouraged with our strategic, financial and operational progress, despite the continuing effects of Covid-19 in some markets and its impact on enrolments in the back to school period. At this important stage of the year, we are on track to meet market expectations for the full year.”

ii round-up:

Pearson (LSE:PSON) today offered broad reassurance in its new strategy as take-up of its new learning app proved strong and it maintained full-year profit guidance. However, the share price hit an 11-month low, so what's going on at the education specialist. 

Overall sales for the nine months to the end of September are up 10%, with only one of its newly formed divisions, higher education, suffering a sales decline. 

Pearson’s move towards digital learning retains momentum as virtual learning revenues grew 14% year-to-date. Assessment sales grew 24% as reduced Covid restrictions aided a return to physical location centres and online revenues continued to expand.

Less favourably, higher education sales have retreated by 7% year-to-date, with Delta variant infections in American colleges potentially deterring new enrolments and signs of strength in the US jobs market offering an alternative. 

The 10% increase in overall sales missed broker UBS’s forecast of 13%, with the broker flagging likely 2022 earnings downgrades. 

Pearson shares fell by more than 10% in UK trading, having gained by around 45% since Covid induced market lows back in March 2020. Shares for scientific publisher and exhibitions provider RELX (LSE:REL) are up by close to 50% over that time, while advertising company WPP (LSE:WPP) has just about doubled.

Financially, group net debt is down year-over-year to £0.7 billion from last year’s £0.9 billion, with management summarising the company’s financial position as ‘robust.’

ii view:

Chief executive Andy Bird, who joined back in October 2020, hopes to reposition Pearson for sustainable growth. Building on demand for digital learning tools, workforce skills gaps and demand for accreditation and certification. Its new five division formation will be made up of Virtual Learning, Higher Education, English Language Learning, Workforce Skills and Assessment & Qualifications.

For investors, the pandemic has accelerated the company’s existing move online. Previous initiatives to switch from textbooks to online materials have now been extended to target consumers directly, and beyond students attending schools and colleges. Business disposals have helped reduce group net debt and an estimated forward dividend yield of over 2.5% is not to be sniffed at in an era of ultra-low interest rates. 

However, some impact from the pandemic is still being felt, while the company’s record for transformations is arguably patchy. An estimated price/earnings ratio above the three- and 10-year averages, even after a significant decline in share price since the summer peak, also suggests the shares are not obviously cheap. For now, with an ongoing transition and clear lack of support from investors, the company may have to provide ore convincing evidence of recovery before buyers return. 

Positives: 

• Cost savings programme ongoing
• Forecast dividend yield of over 2.5% (not guaranteed)

Negatives:

• Adjusted profit fell for three of its four existing divisions over 2020
• Covid disruption being suffered

The average rating of stock market analysts:

Hold