We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Pearson shares fall over 10% on weak Q3 trading

Charles Huggins | 21 October 2015 | A A A
Pearson shares fall over 10% on weak Q3 trading

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Pearson plc Ordinary 25p

Sell: 589.20 | Buy: 589.80 | Change 12.80 (2.22%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Pearson's third quarter trading update reveals a weaker than expected performance, with sales down by 5% in Q3, and down by 2% for the first nine months of 2015 (both at constant exchange rates). The declines were due to challenging conditions in some of Pearson's largest markets; in particular, lower Community College enrolments and higher returns in US higher education; and lower purchasing in certain provinces affecting the school textbook market in South Africa. This, combined with the impact of disposals and unfavourable exchange rate movements, has led Pearson to reduce its full year earnings guidance. The shares fell by 10% in early morning trading.

Performance by market (constant exchange rates):

North America - Revenues were down by 1% in the first nine months of 2015. In Higher Education, courseware revenues declined, with market share gains more than offset by a weaker market caused by lower Community College enrolments.

Core - Revenues were down by 5% in the first nine months. Growth in Italy was more than offset by the impact of UK policy changes and declines in Western Europe.

Growth: Revenues declined by 1% with growth in China and Venture markets, and stability in Brazil offset by continued weakness in South Africa.

Full year earnings guidance:

The disposal of PowerSchool, FT Group and The Economist Group, as well as unfavourable exchange rate movements since the start of the year, have led the group to reduce its full year earnings guidance from 75-80p to 70-75p. Due to the challenging market conditions alluded to above, Pearson expects full year EPS to come it at the bottom end of this new range.

Pearson's chief executive John Fallon commented:

"The key cyclical and policy-related factors which have been hurting our markets for some years have yet to improve. We are performing well competitively and gaining share across many areas of our business. We continue to manage our costs tightly while investing in new products and services to inspire the next generation of students."

Our view:

Pearson has been trying to reinvent itself from a print-based education company, exposed to pressured Western education budgets to a digitally-focused business with an expanding emerging markets presence.

The reinvention has been painful in the short term with hefty restructuring charges incurred along the way. And it is far from complete. Around 85% of revenues still come from Western markets, and some 40% of the business is still exposed to declining print-based sources. As the transition from print to digital continues, Pearson is likely to experience further revenue pressures, as sales from textbooks are replaced by subscription-based software revenues, which are initially lower but recurring in nature.

Pearson is also battling some severe market headwinds. The US economic recovery is leading to more people in work and fewer people signing up for college courses, which isn't helping Pearson's North American education business (c. two thirds of sales). Western education budgets are under pressure generally and some emerging markets such as South Africa are also weak.

In the longer term, Pearson still has plenty of opportunity to grow. Cyclical and policy related headwinds in Western markets are unlikely to last forever and over time, spending on education should rise, particularly in digital. The disposal of the FT, PowerSchool and The Economist Group for around £1.4bn sharpens the group's focus on its education business and gives it substantial firepower to accelerate the print-to-digital transition.

In the near term, market conditions show little sign of improving. But the historic yield of 4.9% (variable and not guaranteed) means investors are at least receiving something while they wait for the prospect of better times.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.