The story behind Pearson’s dive to 11-year low

It’s halved in value over the past year, and the educational publisher is struggling to find friends.

Pearson (LSE:PSON) shares traded at a decade low today after updated profits guidance appeared to dash investor hopes that 2020 will mark a new chapter for the educational publisher.

The story of this year looks to be all too familiar as the FTSE 100 index company struggles to offset the faster-than-expected transition from print to digital by US Higher Education students.

Operating profits will be between £500 million and £580 million, which is down on the below-forecast £590 million the company expects to report in next month's 2019 results. Earnings per share guidance for 2020 of between 44p and 52.5p is between 2% and 18% below City forecasts.

Shares opened 14% down at 533p but recovered from this 11-year low to later stand 6% cheaper at 580p. The turnaround reflects continued support from some analysts, with UBS holding a price target of 820p prior to the update and Morgan Stanley sitting at 625p.

Source: TradingView Past performance is not a guide to future performance

Pearson has also started the £350 million buy back of 7% of its equity following the £530 million sale of its remaining 25% stake in Penguin Random House to Bertelsmann. With CEO John Fallon set to leave Pearson this year, the company added that chief financial officer Coram Williams was also going, to be replaced by deputy Sally Johnson.

Fallon, who has been at the helm for seven years, presided over spectacular share price gains in 2018, only for these to evaporate on signs that cost savings rather than revenues growth were the driving force behind the progress. The £590 million now expected for 2019 operating profits compares with the £640 million forecast in the City last year.

This decline is partly due to the rate at which students have turned away from print products being more rapid than expected. Fewer college enrolments haven't helped, leading to today's forecast 12% decline in Higher Education courseware sales for 2019 and a 30% drop for print sales.

In 2019, Pearson sold 3.7 million textbooks to students at US universities, compared to 7.4 million in 2016 and 21 million a decade ago.

The downward trend has been offset by a stronger performance in the broader 76% of the Pearson business, which covers professional certification and assessments and qualifications.

Fallon said Pearson was now a simpler and more efficient company: “The future of learning will be increasingly digital and consumer defined.

“Experience, outcomes and affordability will all matter and while there is still much to do we are well placed to benefit from these trends to achieve future, sustainable growth.”

The businesses outside of US Higher Education Courseware grew revenues 4% overall in 2019, with the rate for this year likely to be in the low single digits. The rest of Pearson will continue to see heavy declines offset by modest growth in digital.