Share price rises following positive predictions.
Pearson expects return to growth, but analyst remains unconvinced
- The education publishing business anticipates a return to underlying profit growth, sending shares up by roughly 5% in early morning trading
- But due to a discouraging track record and a history of profit warnings, analyst is not convinced of a success turnaround story yet
- We recommend a ‘hold’ for the shares for investors seeking a balanced return and willing to accept a medium level of risk.
Given Pearson’s poor few years, a fairly lacklustre and uninspiring trading update was actually relatively positively received by the market leaving the shares higher by roughly 5% at the open.
The education and publishing group’s total revenue for the first nine months of 2018 was flat while the consensus expected a very modest gain. Its key North American market where sales had been expected to fall by 0.8% managed to stay flat which was a key positive takeaway, but the US Higher Education courseware segment still faced a challenging environment. Ironically, within the divisions of the business that they call “Growth”, which is predominantly composed of emerging market regions, sales actually fell by 4% - mostly as a result of the anticipated fall in sales in South Africa, while English language materials to China did well.
Management have kept the 2018 adjusted operating profit guidance unchanged at £520m to £560m but has reiterated that there will be underlying profit growth for the year. They remain on track for £300m of cost savings with the benefits to accrue from the end of 2019 onwards. As a result of one-off tax benefits they expect earnings per share for the year to be much higher at between 68p to 72p.
The tone of the management’s comments was better and one of optimism for the future as the turnaround plan begins to stabilise the business. A focus on providing more of its products online is essential and here it seems they are making some progress.
For us though, we need more evidence that the management’s implemented plans are working in a highly competitive online environment. We have had so many profit warnings over the years that we are not fully convinced that a turnaround is coming. We can at best recommend a ‘hold’ for the shares for investors seeking a balanced return and willing to accept a medium level of risk.
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