Pearson shares: pass or fail after another revamp?

<p>Michael Fallon, CEO of the world’s biggest education company, and by default the biggest book publisher, might feel like he’s been back at school over […]</p>

Michael Fallon, CEO of the world’s biggest education company, and by default the biggest book publisher, might feel like he’s been back at school over the last two years.

It’s been a testing time for him and Pearson investors—meaning a testing time for many of us.

With just 373 institutions, including pension funds, holding 70% of PSON, don’t be surprised if you too own a piece of your own educational background.

Late in the session, the stock remained the day’s top FTSE 100 performer by some length—up 18%.

Bear in mind though, it was also down 55% since March before its lowest close since 2009 on Wednesday.

 

 

CEO Fallon hopes to stop burning shareholder value hand over fist with the Pearson’s latest restructuring plan.

No, really this time.

For the second time in his two years as headmaster, Fallon has mandated millions in expenditure to improve Pearson’s grades—£320m in 2016 this time, to re-restructure.

Go big or go home—the c. £100m top market forecast for these costs was clearly not thought to be enough to cut it.

Think of it as a down payment on much stronger growth in 2018, investors were led to believe on Thursday.

That’ll be as much as 35% off re-downgraded 2015 Ebitda guidance please—and, no final dividend increase this year, sorry.

Look, the dividend will still be up 2.2% year on year (and earnings will barely cover even that).

Be thankful it wasn’t cut entirely as some feared.

Back offices will be combined in schools and professional testing.

Beyond that, details of improved strategy with respect to digital were sparse.

(Pearson’s near-downfall may have started with its much touted shift to digital—remember, ground zero was originally meant to be in 2015?)

The world has, to be fair, inconveniently failed to go along with PSON plans.

A strong recovery in the US jobs market has meant fewer mature students going to college.

The age of austerity hasn’t helped—see Brazil and South Africa.

These countries naturally don’t pay much heed to Pearson central planning before making changes in education policy either.

CEO Fallon said he was confident on Thursday US college enrolments will stabilize and changes in UK testing will ease by the end of 2017.

Well, he hasn’t been right yet, and he should for his sake probably be right this time.

The series of profit warnings from Pearson since he took over in 2013 has clearly tried investor patience.

New chairman Sidney Taurel, former CEO of Eli Lilly, only just moved into his office on 1st January.

Taurel “knows global markets well” to quote CEO Fallon, admittedly out of context—from a statement of welcome to his new boss.

If there was an element of unwitting truth, Taurel will understand that ‘a change is as good as a rest’.

The current CEO might expect both if no signs appear that the strategy he affirmed on Thursday is taking.

 

DAILY CHART: PEARSON

PEARSON DAILY POST TRADING STATEMENT 21ST JANUARY 2016

 

An early sign that Pearson might be leaving ‘Random House’ and instead ‘picking up a Penguin’ might be if the share maintains Thursday’s poise for the medium term.

The stock staged a fight back at the completion of an 100% (718p) extension of the slide from 2015 high (1517p) to 1st September 1st low (1010p).

From here, 800p, 846p and then 912p would appear to be a tough ask, even for a stock with fundamental juice to spare, something which Pearson doesn’t have yet.

 

 

 

 

 

 

 

 

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.