Pearson shares eye deeper collapse after earnings markdown

<p>After recently transitioning into ‘pure’ education, Pearson dropped an earnings bombshell about its now core division, tipping its shares 17% lower.   It said earnings would […]</p>

After recently transitioning into ‘pure’ education, Pearson dropped an earnings bombshell about its now core division, tipping its shares 17% lower.

 

It said earnings would be at the bottom end of forecast ranges after US college enrolments went quiet and some South African text books were left on shelves.

2015 EPS was likelier to be closer to 70p was than 75p, said Pearson.

The news comes just weeks after PSON completed its exit from the media world, by selling its 50% stake in The Economist to other shareholders for £469m, and the FT to Nikkei Inc. for £844m.

 

Pearson: ‘Always Learning’; US college goers less so

The signal of organic upset from the 171-year old publisher, despite an implied £1.3bn buffer from the disposals, has not gone down well.

Its shares have.

This is their biggest one-day fall for 28 years—almost to the day—after the stock collapsed in the wake of the original ‘Black Monday’, 1987.

The fall as deep as 16% feels slightly overcooked.

The admission by CEO John Fallon that “key cyclical and policy-related factors which have been hurting our markets for some years have yet to improve,” was sober, but by no means cataclysmic.

Pearson Education has after all been ‘bedding down’ for years, to put it most charitably.

At the very least Wednesday’s news ought not to be a huge surprise.

The likely 70p EPS outcome Pearson disclosed would still be the first rise in nominal earnings attributable to shareholders since 2011.

 

Fidgety forecasting

However, investors have in mind a previous downgrade of the range—from 75p-80p to 70p-75p.

Linked to Pearson’s exit from revenue earners FT Group and The Economist Group, shareholders absorbed the first guidance cut well, probably as it was juxtaposed with media takings.

But the FTSE 100 stalwart’s mild premium of 15.7x forward price/earnings compared to similar European publishers, is not matched with commensurate income.

Pearson was already rated 33% lower versus rivals in terms of its ability to convert debt or equity capital into sales.

Those ratings will now have to be cut further.

This realisation might well lie behind a sudden departure of certain major shareholders on Wednesday.

There was sufficient urgency in their flight to leave a 7%-wide gap of offers without takers.

Buyers only began to step in 8% below Tuesday’s close.

This loss of confidence looks sudden, but has clearly been going on for some time.

It is clearly reflected by the collapse of a trend that had held since October 2008.

PSON settled at a support zone stemming from 2010 at the time of writing, around 980p.

It’s the last plausible, proven buttress since 2010.

Strong enough to break the shares’ biggest fall for 28 years?

The stock has already had a look below, and found thin air.

An extension of PSON’s failed comeback from the March-September slide unearths a 61.8% interval at 918p.

 

DAILY CHART

PEARSON DAILY POST PROFIT WARNING 21ST OCTOBER 2015

Please click image to enlarge

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.