Nick Train losing patience may be one of the ultimate bear signals. The star fund manager and co-founder of Lindsell Train, a famously low churner of stocks and formerly Pearson’s largest shareholder, has cut his holding in the world’s largest education specialist in half. Retail investors take note.
Pearson has been a slow learner in its attempts to reposition away from the structurally declining market for new print textbooks. Under John Fallon, its former boss, it issued seven profit warnings in as many years, a bruising from which the shares have yet to recover. The appointment in 2020 of Andy Bird, the former chairman of Disney’s international division, ushered in an organisational restructure and a focus on distributing educational materials directly to consumers, rather than predominantly via schools and colleges.
The turnaround case is far from proven and the shares don’t look particularly compelling value, either, at almost 16 times forecast earnings next year, a touch above the average multiple over the past five years.
Exposure to print textbooks remains the thorn in the side. The rise of Amazon has eroded revenues for what was once Pearson’s core business. The higher price of print materials versus digital meant that although print and bundles — which combine print textbooks and access to online home working platforms — accounted for only 17 per cent of the American higher education college courseware units sold last year, there was an outsized impact on revenue. Underlying revenue for higher education, the second largest division by sales, declined by 5 per cent.
Pearson wants to recapture the secondary market. Bird’s bright idea? Pearson Plus, a Netflix-style online subscription service that gives students access to one ebook for $9.99 a month or the whole Pearson library for $14.99 a month. At the end of December the service had 2.75 million registered users, but only 133,000 were paying specifically to use Pearson Plus. The remainder were already users of other Pearson products, such as the MyLab and Mastering online homework platform, who have opted to access content via the new subscription service instead of the existing route.
It’s that direct-to-consumer distribution route that the company thinks will help to insulate it from any decline in American college enrolments as it hopes to capture demand from those entering the workplace and looking to increase their skills. Analysts at UBS disagree, downgrading the stock to a “sell”, arguing that there is risk to digital courseware revenues “if the US labour market remains tight, student loan interest rates continue to rise and the federal government does not enact support for tuition fees”.
Bulls will point to Pearson’s profit guidance upgrade this month. Underlying revenue for the assessment and qualifications division, now the largest segment, grew by 18 per cent last year and virtual learning revenues were up by 11 per cent. But the former was against a weak comparator during the previous year when many exams were cancelled and the latter benefited as students turned to online lessons. Underlying revenue growth slowed for both during the fourth quarter, at only 2 per cent for assessments and was flat for virtual learning.
Is this just the start of Train’s selling activity? He declined to comment on the rationale for the sale. Pearson that said it continued “to engage with all its shareholders”, but it could struggle to earn a higher grade from the market.
ADVICE Avoid
WHY The decline in courseware sales and tougher annual comparatives elsewhere could prevent the shares re-rating this year
Computacenter
Clogged up supply chains are rarely cause for celebration for corporate management teams, but for Computacenter a rush in customers — acutely conscious of delivery delays — trying to secure products led to a jump in its order book, prompting it to upgrade its profit guidance for last year and boosting revenue visibility for the first half of this one.
The company supplies, installs and maintains technology systems for a range of multinational businesses and government organisations, ranging from Lloyds Banking Group to Facebook to the Ministry of Defence. Sales have been helped by customers increasing investment in hardware and services as they prepared staff to work from home during the pandemic, but the catalysts for revenue growth stretch further back.
Providing technology products together with services gives it a competitive advantage, according to Mike Norris, its boss. More rapid growth in IT spending by companies and government has spurred compound annual growth of 12 per cent and 19 per cent in revenue and adjusted earnings per share, respectively, in the five years to 2020. Last year was the 17th consecutive year of growth in the latter.
That track record has not gone unnoticed. Over the past five years the shares have risen almost fourfold, but a forward earnings multiple of 17 does not look demanding against its history.
Despite increased investment in stock to cope with higher demand, net cash stood at £241 million at the end of last year, above the £184 million expected by Jefferies, the broker. That means there is scope for special returns at some point over the next 12 to 18 months, analysts think, which typically take the form of share buybacks. Ample cash also leaves plenty of room for more acquisitions, which could lead to expansion in the United States.
There’s the risk that some demand has been pulled forward by customers ordering earlier in an effort to counter product delays. Jefferies expects a 3 per cent rise in earnings this year, a slowdown on growth of more than a fifth during the last. But the shares’ valuation doesn’t look overly optimistic.
ADVICE Buy
WHY Shares look inexpensive compared with peers
