As shareholders in Pearson, the world’s biggest educational publisher, banked plumper interim dividends yesterday, they may have glanced ruefully at a share price that has fallen steadily since the half-year results on July 30. They hit a 2021 peak of 869p that day but have since slid to 712p.
That is partly explained by the fact that from August 12 the shares no longer carried the right to that dividend. But as the payment is only 6.3p a share, it hardly accounts for a 157p fall.
The interims were respectable, with sales up an underlying 17 per cent on the half year to June 2020. Operating profits slumped from £107 million to £9 million but that was largely because of restructuring costs and the previous period being flattered by the one-off sale of Penguin Random House, the publisher. Adjusted, the latest profit swelled to £127 million from a £23 million loss previously.
What captured attention, and sent the shares up 25p on the day, was the launch of Pearson+, the company’s long-heralded Netflix-style university app, designed to land on millions of students’ digital devices. It was described by The Times as the cornerstone of the plan by Andy Bird, the new chief executive, to revive the group.
Pearson+ offers students a single monthly eText for $9.99, or unlimited access to 1,500 titles for $14.99 a month. Ten million US students use a Pearson textbook or online device every year, and the service is intended to roll out in Britain and then globally.
However on June 1, two months before that fanfare, a bomb quietly went off that has increasingly damaged the Pearson share price as investors digest the fallout. On that day a contract expired that had entitled Chegg, a US educational publisher, to display Pearson content. Chegg nevertheless continued using the British company’s material.
Last week Pearson filed a lawsuit alleging Chegg had violated its rights on a “massive scale” by reproducing hundreds of thousands of questions from Pearson textbooks and selling them to students with answers as part of a $14.95 “homework help” subscription service. Chegg said that it was “in full compliance with copyright law” and would fight the lawsuit vigorously.
As if that were not bad enough, a day earlier Ishantha Lokuge, Pearson’s direct-to-consumer division’s chief product officer, resigned for personal reasons. Bird said: “Since 2019, Ishantha has spearheaded our direct-to-consumer strategy, helping reimagine and launch multiple digital product initiatives, most notably the successful launch of Pearson+.”
Bird, a former senior Disney executive, is betting heavily on the new plan helping to extricate the group from its historic print base as university populations go online.
The new app should also yield acres of information about customer preferences. “Essentially we’re going to move from the ownership to the access model, just as the music industry moved from the ownership of a song to Spotify and iTunes,” Bird said in July. Pearson will know precisely who is reading what and for how long, enabling it to sell many other products throughout a customer’s student life and beyond.
Pearson began as the holdall for the eponymous family’s wide and at times eccentric business interests, ranging from the Château Latour vineyard to Madame Tussauds waxworks, bought to redeploy oil profits. The ragbag was not much tidier when the group floated in 1969. As the family relinquished its grip, the management gravitated towards the upmarket end of media, buying the Financial Times, Les Echos, Penguin Books and much else. But it struggled to establish a clear focus.
Pearson remains a balance sheet in search of a future. It ditched the newspapers and has settled on educational and professional publishing as a stable segment with promising growth prospects. Buying the shares now, on a prospective yield of 2.75 per cent, is largely a bet on the outcome of the Chegg legal challenge. While it looks pretty much open and shut in Pearson’s favour, US court battles have a habit of dragging on for years. The shares may not have reached bottom.
ADVICE Avoid
WHY Worth another look at around the 650p mark
Tandem Group
The pandemic has been kind to the Aim-listed Tandem Group’s shares, sending them from 115p in March last year to as high as 675p in April this year as many of us bought exercise bicycles and the like to keep fit during the lockdowns.
Although the shares have since eased back, the Birmingham-based toys, home and garden and sports equipment group is valued at only £31 million. Last week it announced that revenue in the first half rose 14 per cent to £19.3 million compared with the first six months of last year. Pre-tax profit was 35 per cent higher at £1.9 million, prompting an increase in the interim dividend from 3.12p a share to 3.43p.
While these are smaller potatoes than Tempus usually considers, Tandem is worth a look if only because of the creative tension between the board and the largest shareholder, Simon Bragg, who has an 11 per cent stake.
Disagreements about Tandem’s corporate governance broke leading up to the group’s annual meeting in June last year, since when there has been silence.
However, Bragg’s presence is a spur to the company’s board and his shares are a potential starting point for anyone with ambitions to buy Tandem.
It is in a sector notorious for waves of consolidation as demand rises and falls.
Cenkos Securities has turned its attention to Tandem, pointing out that it has a prized collection of licences from Disney, Mattel and Warner Bros for the likes of Batman, Peppa Pig and Barbie.
The company is also aligned with the Cop26 green vibe, as it sells e-bicycles and e-scooters.
Cenkos is targeting an 868p share price compared with the 590p at present, where the price-to-earnings ratio is a modest 7.9.
ADVICE Buy
WHY Shares are undervalued and may attract a bidder
