Pearson does not appear to realise what business it is in. It describes itself as the world’s leading learning company, when it would be more accurate to call it a middling-sized media firm that happens to specialise in education.
The identity crisis goes back to when it was an oil company that diversified into Château Latour vineyards, Madame Tussauds waxworks, Lazard merchant bank, film production, Thames Television, satellite broadcasting, Penguin books and the Financial Times. In the 1990s, after the founding family bowed out, it ditched the corporate trophies and concentrated on educational publishing.
That is good and bad. It is a big fish in a small pool, with plenty of potential as artificial intelligence develops individually tailored courses and other cost-saving tricks, creating a moat against fresh competition. But there are real whales in the wider media ocean, capable of swimming over the widest moats to snap up any specialists that take their fancy. Both can benefit shareholders, of course.
In public at least, the Pearson leadership seems blissfully ignorant of the threat, despite seeing off three takeover bids from the Apollo private equity house last year, and having a chief executive, Andy Bird, from the Walt Disney company.
As if to underline the point, Bird has launched a Disney+ lookalike, Pearson+, that for $9.99 (£8.25) a month offers over 1,500 etextbooks accompanied by audio, flashcards, notes and videos. By the end of last year it had 2.83 million registered users and 406,000 paid subscriptions, three times more than at end-2021. The difference is partly explained by some users accessing the service through other channels.
Pearson+ is part of the higher education unit, where sales shrank 4 per cent to £900 million last year due to fewer enrolments and, worryingly, “loss of adoptions to non-mainstream publishers”, a competitive problem to which Pearson responded by raising prices.
The biggest division issues qualifications, certificates and licences, with £1.44 billion in 2022 sales, up 8 per cent.
The last annual report, for 2021, asked “Why invest in us?” and answered that Pearson helps transform lives, livelihoods and societies. That is laudable, but where was the bit about what investors can expect? The omission suggests the priorities may be out of focus.
Nevertheless, the commercial possibilities are vast in a market that is driven by rising living standards and could generate £7 trillion revenues globally by 2030. Bird wants the group’s divisions to cross-sell more, and sees £120 million of cost efficiencies.
Pearson has a staunch City fan club, including Citibank, JP Morgan Cazenove and Deutsche Bank. JP Morgan’s Daniel Kerven points to “potential upside to enrolments over the next two to three years from post-pandemic normalisation and higher unemployment, from secondary market recapture and from the rollout and adoption of its end-to-end solution for workforce skills”.
The company has prepared the market for around £440 million 2022 pretax profits, rising to £560 million in two years. The latter figure would produce diluted earnings per share of 58p and an undemanding 15.3 p/e ratio. The annual dividend should add 2p to 23.5p by then, giving a 2.6 per cent yield.
These are respectable numbers for a well-managed group in a growing sector with ample defences against economic headwinds. Attractive enough, indeed, for Apollo or someone else to decide that Pearson is worth taking out once economic prospects become clearer. At below 900p, the bid hopes are in for free.
ADVICE Buy
WHY The company has a strong business model, with the perennial possibility of a takeover bid
JD Wetherspoon
Hospitality has been one of the most embattled sectors during and since Covid. Companies’ experiences have varied widely, making investment choices difficult.
Shares in JD Wetherspoon have been among the worst hit, having shrunk by three quarters since the start of 2020. To any contrarian, that potentially represents a mouth-watering recovery play. But is this the moment?
The shares fell only as low as 700p in early 2020, rebounding to £14 the following year on hopes of a post-lockdown rush back to boozers. While they have struggled to stay above 500p, the long decline seems to have flattened out.
Tim Martin, founder and chairman, complains about what he sees as supermarkets’ tax advantage, since their customers do not pay the 20 per cent VAT on food that is obligatory in pubs and restaurants.
Supermarkets do sell a far higher proportion of beer than they used to, but they are very different markets. The bigger and still unanswered question is how pub-going habits will settle down long-term after Covid and the surge in inflation.
The hardest development to assess has been working from home. It has hit all city centre hospitality providers, although there are signs that habits may be changing. A trend has developed for office workers to travel into town on Fridays to meet friends. And, as school-leavers join the workforce, they will be more likely to stay in the workplace to learn their trades.
For all his gloom, Martin expects that “we’ll get back to pre-pandemic prosperity in due course. Pub trade has ever so gradually been improving”. He has recently spent over £10 million on 2.6 million Wetherspoon shares which, after the shares have fallen so far, looks like he is trying to call the turn. He has since had the confidence to raise the price of a pint by 29p this month. Interim results are due on March 24.
Roberta Ciaccia at Investec says: “The moment of truth will come from this month, when consumers are more likely to rein in spending. We expect Wetherspoon to be resilient in a difficult year.”
In November 2021 this column recommended avoiding the shares at 958p. Time to reconsider.
ADVICE Buy
WHY Worth following the chairman’s example
