Narrow-Moat Pearson Surprises With Positive 1Q Update
Positive sales growth is encouraging, and we reiterate our fair value estimate.
Narrow-moat Pearson (PSO) delivered a positive first-quarter update, to the delight of the investment community, following the profit warning that caused the shares to fall heavily in the prior quarter. Underlying sales growth of 6% in the first quarter was combined with the announcement of another restructuring program, which is expected to reduce overall costs by 750 basis points by the end of 2019. While we are encouraged by the positive sales growth, we do not expect to make any changes to our forecasts at this early point in the year, and we reiterate our GBX 740 fair value estimate.
Growth of 7% in North America--Pearson’s largest division, which generates more than 70% of operating profit--was driven by growth in higher education and K-12 courseware. Surprisingly, Pearson has issued a strategic review of its K-12 business due to the slow adoption of digital courseware, an issue many did not know existed. The key for us in North America was the unexpected growth in higher education, but given the strong weighting to the second half in this business, we defer our enthusiasm until later in the year if, and when, the momentum in this business continues.
Given the lack of top-line growth in Pearson over the past five years, restructuring and cost-cutting measures have been paramount in increasing profitability. The announcement of another significant cost-saving program has clearly excited investors, with the shares up strongly on the announcement; however, with little detail thus far on this program, we await tangible signs of improvement in these areas before attributing full credit for these measures.
Overall, there were many positives in this update, but equally, some concerns and challenges remain, including the effectiveness of Pearson’s eBook rental program in U.S. higher education, which was the key source of the group’s disappointing performance in 2016.
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Michael Field does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.