Pearson investors unclear of company vision as shares tumble

Pearson investors unclear of company vision as shares tumble

Pearson investors have “little visibility” on what the company may do in the next few months, one analyst has warned, while another has said further restructuring at the academic publisher was “almost inevitable.”

The analysts were speaking after the share price at the company tumbled last week, down 5.6% at 773.00p on 12th November.

One reason for the share price fall could have been c.e.o John Fallon’s comments made at the Morgan Stanley European Technology, Media and Telecom Conference in Barcelona, on Wednesday (12th November), one analyst has said, in which Fallon said the company was unlikely to see the same 7% growth its seen over the last decade.

"In terms of our allocation of capital, our (Pearson's) first priority is the dividend and sustaining the dividend," he said. 

Fallon added that while long-term trends pointed to “stabilisation” in 2017, followed then by “some growth,” the company was “obviously probably not likely to see the sort of 7% growth that we’ve seen [over the past decade]”. He also indicated that US college enrolments were expected to shrink by 2% this year. 

At a similar time, Bloomberg cited Peel Hunt analyst Alex De Groote as saying he “expected Pearson to issue another profit warning in the next few weeks and then to cut the dividend”, which caused Pearson to lose stock further, according to Digital Look.

Claudio Aspesi, an analyst from Sanford Bernstein, told The Bookseller: "I think more broadly it's not just [Fallon's comments] it's that investors are increasingly concerned about the risk of an additional profit warning from the company going forward. At this stage investors believe they have little visibility on what the company may do in the months to come. And therefore they are just losing stock.

"Markets tend to respond very quickly to changes in trading conditions, so what Fallon had to say on Wednesday moved the share price on Wednesday. What happened (last week) was that a broker in particular said that a profit warning was likely. So that's really what the shares did (last week). 

"More broadly we think investors are struggling to figure out what will happen next."

Last month on October 21st, shares slid by almost 16% in what has been described as the educational publisher's biggest slump in decades following a full-year profit warning it issued.  

Chris Collett at Deutsche Bank said in a report which followed that restructuring at Pearson was "almost inevitable".

"Pearson is facing more challenges coming into 2016, with headwinds from £100m lost testing contracts, likely limited adoptions (California ELA) and continued challenges in open territories and college textbooks,” he said. “We forecast just 1% organic growth in FY16 (driven by the very uncertain Growth division)which will represent the sixth year in a row that group revenues have declined or grown no more than 1%. 

 "We think professors are becoming more aware of the problems of setting compulsory textbooks, which can cost upwards of $200 and are increasingly turning to free and low cost alternatives. If profitability in College were to move to School levels it would result in 15% reduction in operating profit." 

Pearson simplified its business by selling the FT to Nikkei in July for £844m, a transaction closing at the end of this month, and it also sold its stake in The Economist in August for £469m, for roughly 1.3bn proceeds total, reducing Pearson's net debt and as part of its strategy to be "100% focussed" on education.

Fallon reiterated at the media conference on Wednesday that Pearson would not sell its stake in Penguin Random House until at least 2017, partially because the company was waiting to see what impact the renegotiation of the PRH e-book terms will have on its value. 

"It's an issue we will consider at some point (selling Pearson’s PRH stake) but it's more likely to be a 2017 than a 2016 issue, “ Fallon said. "There are two big things going on at Penguin Random House at the moment. One, we are still going through the restructuring of the company, so there's still consolidation of the back office systems, and that will not be complete for another 12 months.

"And secondly, we've seen across the industry negotiation of e-book terms and what implication that will have of e-book sales over the next six-12 months - so I think from our point of view, it makes sense to allow both of those issues to become clear before we look at any discussion with PRH because clearly we'd be giving away value if we didn't let those issues play through first."

Pearson has a 47% stake in PRH while Bertelsmann has 53%. Bertelsmann, which recently achieved record profit growth, has previously said it "could imagine raising our stake in Penguin Random House in steps".