Pearson plc (PSON) Ordinary 25p
HL comment (17 January 2024)
Pearson's underlying group sales rose 5% for the full year. Growth was led by Assessment & Qualifications and English Language Learning. The latter was helped by favourable migration policies in Australia. Virtual Learning sales fell 20%, reflecting the previously announced losses of contracts.
The group expects to report underlying operating profit of around £570 - £575mn, up more than 30% on the prior year. This reflects the higher sales and £120mn of cost savings.
The group had net debt of "less than" £0.8bn at the end of the period.
More detailed full-year results are expected on 1 March.
The shares fell 1.7% following the announcement.
The market had a tepid response to the latest trading update. We think that's because of a lack of upgrade, rather than because of anything more serious.
We continue to think educational specialist Pearson can teach us all a thing or two about resilience. While the wider economy is under pressure, the likes of vocational testing, English Language Learning and broader assessments and qualifications are all being taken up in force, boosting Pearson's top and bottom line.
A laser-like focus on boosting digital areas of the business and reducing exposure to the declining courseware business, means margins are climbing. Wider improvements have been achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include focusing on direct-to-consumer business and slimming the group's physical footprint.
The successful pivot to digital allows more revenue to drop straight through to profit and crucially, cash flow. This gives Pearson room to pay dividends and return more to shareholders via share buybacks.
Cash flow is being partially hampered by restructuring costs at the moment - while this isn't something we're concerned about right now, it will be important to monitor the efforts to make sure the goal posts aren't moved as this could have an impact on dividends. This is well supported by earnings for now but remember no shareholder returns are ever guaranteed.
Looking to the short-term, times of economic difficulty are often seen in conjunction with people upskilling, which is a structural opportunity for Pearson.
While we're happy Pearson's on the right track, and the turnaround plans are coming good, we're keeping an eye on a couple of points. It's unclear how much the group will benefit from a return to more normal teaching and exams. At the moment the uptick is promising, but they were starting from a very low base because of the pandemic. 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 isn't going to reverse.
As the strategic pivot continues, we're mindful that budgets and margin projections can turn at short notice too, particularly in an inflationary environment.
Pearson is putting in a good showing, and we're feeling more positive that it can convince customers to stick with its digital shift. The price-to-earnings ratio is slightly below the ten-year average, which suggests the market isn't overly worried about Pearson's position, but there's work to be done if the group wants to spark a more meaningful reaction from investors.
Pearson key facts
Forward price/earnings ratio (next 12 months): 15.1
Ten year average forward price/earnings ratio: 15.3
Prospective dividend yield (next 12 months): 2.4%
Ten year average prospective dividend yield: 3.6%
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.
Previous Pearson plc updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.