Thursday 14 December 2017

Pearson's slow progress in turning over a new leaf

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Click to enlarge

John Lynch

The Canadian economist Kenneth Galbraith once made a rash statement during one of his legendary broadcasts that Ireland never produced a great economist.

He deeply regretted saying so because from behind every bush, from that day on, he was assailed with names and dates of spectacular Irish contributors to the 'dismal science'. However, Galbraith said something else that no Irish person can do anything but endorse. He said poverty can only be solved by emigration or education.

In many respects in Ireland we have made an unfortunate business out of emigration but it is a pity we haven't made a bigger business out of education.

Our company this morning, Pearson plc, has chosen education as its business and made it a global one. But even noble endeavours like education are not guaranteed consistently high growth performances, as the recent experience of Pearson has shown.

Up to last year it was in the newspaper publishing business and the owner of the 'Financial Times' and 'The Economist'. Investors asked if this exit was keeping 'ahead of the curve' or was it a reflection of the willingness of Pearson to be constantly dynamic? Pearson, after all, started life 172 years ago as a construction company.

Getting out of newspapers wasn't exactly an abrupt change. It's been a gradual process. It has long controlled the paperback pioneer, Penguin, and three years ago it merged its publication business with the German group, Bertelsmann. The new company, Penguin Random House, publishes more than 15,000 new books annually, producing blockbusters like the 'Diary of a Wimpy Kid' series, among others.

Today Pearson is a worldwide education business with a 47pc interest in Penguin Random House. It delivers its educational content in a variety of forms including books and online services.

Its products serve governments, institutions and individuals. The services include content, testing, administration and processing for teacher development including software, operating in 70 countries worldwide.

The company operates in three segments which it designates as 'North America', 'Core' and 'Growth.' The North American business offers learning from early education through elementary, middle, high school, colleges and universities. The US is the company's largest market with 63pc of sales and also the most profitable segment accounting for almost three-quarters of the group's operating profit.

Pearson regards its 'core' markets as Australia and Western Europe which account for almost one fifth of sales and operating profit. Its 'growth' markets notched up sales last year of £700m but was unprofitable.

The group's sales of £4.5bn have been buffeted in the last 3 years, declining by almost £1bn with its core and growth segments suffering the most.

Operating profits last year were £723m and guidance for this year is £600m but this hinges on cost savings. While the company has benefited from currency movements and the removal of executive bonus payments, the gains have been eroded by trading pressures and reconstruction costs.

Unfortunately for investors the shares have dropped from a ten-year high of £15 to £6 at the end of last year.

Following a second profit warning it would appear that investors are again warming to Pearson, the shares rising to £8 giving the company a market value of £6.6bn.

Unsurprisingly, failure to reach profit targets displeased investors. In addition investors were unhappy with management vagueness about the promise of a return to growth in 2018.

To some analyst this is unrealistic. They are, however, pleased that the dividend remains unchanged and that net debt was reduced by £1bn.

Overall the outlook for 2016 remains 'challenging' in all of Pearson's major markets. But before investing clarity as to the speed and scales of its savings is essential, so I remain neutral.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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