When Pearson sold the Financial Times to Nikkei in 2015, it was making a statement as well as banking a trophy price. After 58 years of ownership, the company was removing the last vestige of its history as a conglomerate and turning its back on newspapers: education was the future.
However, since the £844m sale, Pearson has lost nearly 25% of its value. First it blamed lower enrolments at some American colleges and a fall in textbook purchases in South Africa. Then there was more bad news: students were buying second-hand books on eBay and Amazon.
In 2017 Pearson was forced to cut its dividend, slash 3,000 jobs and plan £330m of savings by 2021. Shares hit a low of 568.5p in September that year.
Having put the publisher Penguin into a joint venture with Random House in 2012, Pearson sold a 22% stake in it to Bertelsmann for £761m in 2017, keeping 25%.
Pearson has sought to reposition itself as a digital leader in educational materials. The share price has bounced back, closing on Friday at 926.4p, to value the company at £7.2bn. Supporters say Pearson has cut its net debt from £2bn in 2013 to about £200m by the end of last year.
The market seems to agree that the company’s fortunes are improving. Pearson was the fifth best-performing FTSE 100 stock last year, up more than 27%.
So can Pearson continue to deliver in 2019? The early signs are not good. Just two weeks in, Pearson revealed higher-education revenues in the US — its biggest market — had fallen 5%. Profit guidance for the year would have been cut had it not made extra savings, the company said.
The broker Liberum said there was “only so much cost-cutting you can do to mask the underlying problems facing the business”. The shares fell 6% on the update.
Pearson must now prove it can maintain printed-book revenues while shepherding customers into the digital era.
The trends are challenging. Students are increasingly getting books when needed rather than at the start of each academic year. Also, Pearson is vulnerable to cuts in education funding, often dependent on political will.
The shares have stabilised since their January blip and Pearson is trading on a forward price/earnings ratio of 15.7, similar to those of rivals Axel Springer and Relx.
Barclays has an 830p target on the stock, while Citigroup has 975p. There may be a small uplift in the months ahead, but unless Pearson improves its earnings without relying on cost-cutting, it may be some time before there is any real uplift. Hold.
