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Pearson - full year guidance intact

Pearson's on track to achieve full year sales and underlying operating profit in-line with the market's expectations.

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Pearson's on track to achieve full year sales and underlying operating profit in-line with the market's expectations. It also expects to deliver at least £100m of efficiencies in 2023, meaning improved margin targets - of having a mid-teen margin- are being pulled forward from 2025 to 2023.

Underlying sales rose 7% in the third quarter, with growth across all divisions apart from Higher Education, as expected, reflecting continued declines in US Higher Education Courseware sales. Border re-openings meant there was a particularly strong performance from English Language Learning, where sales rose 28% reflecting growth in Pearson Test of English.

Pearson's completed £240m of its £350m share buyback programme.

The shares rose 2.3% following the announcement.

View the latest Pearson share price and how to deal

Our view

Education specialist Pearson's shift towards digital is happening faster and more smoothly than we - or the market for that matter - expected.

That's being achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include, focussing on direct-to-consumer business and slimming the group's physical footprint.

Digital sales are potentially highly cash generative and higher margin than physical sales, while digital subscribers are potentially stickier. We said that this would represent a significant improvement to earnings quality if Pearson can deliver the transition - especially in the core education courseware business. And we are starting to see digital make up a bigger part of the whole - largely thanks to accelerated demand for virtual learning and exams brought on by the pandemic.

But much of the group's revenues are still anchored to physical teaching and testing. Demand for physical textbooks has been on the decline for years and that's made Pearson's pivot to digital protracted and painful.

Even where Pearson has been able to grow sales, profits haven't historically flowed smoothly. Huge investment has caused some short-term pain to margins too. We're heartened that extra cost savings have upped the outlook here, but as the strategic pivot continues, we're mindful that budgets and margins projections can turn at short notice, particularly in an inflationary environment.

We're also aware that those currently dipping their toes in online education for the first time could swim away when more traditional alternatives become available.

Overall, the group's poured an enormous amount of cash into securing a new digital-focussed future. Although net debt's more manageable on an annual basis, providing the foundation for shareholder returns. Please remember no shareholder returns are ever guaranteed.

Pearson is putting in a good showing, and we're feeling more positive that it can convince customers to stick with its digital shift. If this is achieved, the pain of the last few years will have been worth it. If not, the group risks becoming a lesson in how not to handle the digital revolution. The price to earnings ratio is higher than the ten-year average, reflecting confidence from the market.

Pearson key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 24th October 2022