Higher earnings forecasts fail to prop up Pearson shares
Investors were disappointed by a fall in revenues and a weaker 2018 outlook.
Pearson shares tumbled as investors focused on declining revenues and a weak outlook for 2018 rather than the disposals and favourable tax rates that helped the company raise annual profit forecasts.
The education group issued a trading update on Wednesday, showing that it now expects full-year adjusted operating profit at the upper end of its guidance at £600 million to £605 million – based on a sterling-dollar exchange rate of at least $1.23.
That compares with guidance issued in October which forecast earnings at between £576 million and £606 million.
The upgrade was chalked up to “an improved tax rate” linked to “the further favourable outcome of certain historical tax issues”.
Pearson also benefited from a series of disposals on the back of an efficiency drive, including the sale of its Global Education division as well as a 22% stake in Penguin Random House.
But the company also reported a 2% drop in total underlying revenues for 2017 , driven in part by a 4% drop in its North American operations where US higher education courseware dropped 3% in part due to “cautious buying behaviour” from partners.
It is now expecting lower adjusted operating profit of between £520 million and £560 million for 2018, which Pearson said reflected “the benefits of our restructuring programme and ongoing challenges in US higher education courseware”.
Pearson shares were one of the worst performers on the FTSE 100 in morning trading, down 6.3% or 45.6p at 672.8p.
Chief executive John Fallon said: “We made good progress in 2017 on the simplification of our portfolio, the strengthening of our balance sheet and delivered results at the top end of guidance.
“Our restructuring programme is on track and our 2017 performance has set us up well to make further progress against our strategic priorities and grow profit in 2018.”
The company is aiming for £300 million in annual cost savings by 2020 as part of that restructuring programme.
George Salmon, an equity analyst at Hargreaves Lansdown, said: “When a company raises profit guidance, it is usually accompanied by a glowing set of numbers.
“That’s not the case at Pearson.
“The uptick in profits leans on a more favourable than expected tax rate and the improvement in the group’s net debt has been driven by the disposals, such as the sale of its 22% interest in Penguin Random House.”
On top of its completed disposals, Pearson has agreed to sell off its language teaching unit Wall Street English as well as a near 45% stake in its Mexican online university partnership Utel, which is expected to close in the second half of this year.
Mr Salmon noted that while digital revenues were growing, that growth was on the back of a move which slashed prices on 2,000 titles.
“That leaves us thinking there’s still plenty of work to be done if Pearson is to pull off a successful transformation from staid publishing house to trailblazer in the emerging world of digital education.”
Pearson will release its full-year results on February 23.