Pearson on track but not everyone's convinced

Quarterly results triggered an early rally, but management has its work cut out getting short-sellers to switch sides. Graeme Evans reports.

A reassuring update from new-look Pearson gave the short-sellers betting against the education company plenty more to think about today, as the FTSE 100 stock continues to build a strong 2018 performance.

More than 10% of Pearson shares are currently out on loan to short-sellers, with the hedge funds and a number of City analysts still unconvinced about whether chief executive John Fallon can deliver long-term sustainable growth.

His plan focuses on digital learning tools and services as Pearson attempts to offset the pressure on its US higher education division, which has been impacted by lower student numbers and a trend for them to rent not buy books.

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The bulk of the company's profits are generated in the second half of the year, which is why it is significant that today's third-quarter update showed the company still on track to meet full-year expectations.

There was the added bonus of one-off tax benefits and a lower finance charge, which will mean 2018 adjusted earnings per share will now be in the range of 68p to 72p, compared with 49p to 53p previously expected.

Shares jumped as high as 880p, up almost 8%, at one stage today before settling to stand 3% stronger at 840p. This represents a gain of 14% on the start of the year, although this figure masks a lumpy performance going back as far as 2015.

Source: TradingView (*)      Past performance is not a guide to future performance

Pearson, which used to own the Financial Times and The Economist, rallied 200% from its financial crisis low only for this share price gain to unwind in spectacular fashion throughout 2015, with the performance since then punctuated by a number of profit warnings.

A significant moment came in August 2017, when Fallon announced plans to cut 3,000 jobs and reduce the company's half-year dividend by 72%. The full-year dividend announced in February this year was 17p, compared with 52p in 2016. 

Fallon remains on track to deliver £300 million of annual cost savings, with no change today in the 2018 guidance for adjusted operating profits of between £520 million and £560 million.

And even though revenues in US higher education courseware fell 3% in the quarter, this was better than the 4% decline forecast in the City as Pearson benefited from digital sales growth. In addition, delivery delays caused by the implementation of new enterprise software systems in the US should reverse in the fourth quarter.

Fallon said today: "We are on track to return to underlying profit growth and, with a strong balance sheet, are set up well for the future.

"We are picking up the pace in our growth opportunities, performing well competitively and making good progress in our digital transformation."

This online overhaul of the business saw 2017 revenues split three ways between digital (32%), digitally enabled (27%) and non-digital (41%). Digital courseware revenues in US higher education grew by 9% last year, although this was offset by pressure on print revenues.

*Horizontal lines on charts represent previous technical support and resistance.