Pearson Share Price Undervalued Despite Rise

Shares in educational publisher Pearson rose 8% after an upbeat third-quarter trading update from the company

Morningstar Equity Analysts 17 October, 2017 | 2:59PM
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Computers in a classroom

Educational publisher Pearson (PSON) reported a relatively upbeat third-quarter update on Tuesday: group revenue, while still declining on an underlying basis, benefited from positive currency movements, growing by 4% in the first nine months of the year. Management have upgraded full-year guidance to the upper end of the previously guided range, which is now slightly ahead of Morningstar equity analysts forecasts. Shares are up 8% on the news.

As such, while analysts do not expect to make any material changes to our forecasts or to our 740p fair value estimate, we will tweak our numbers to reflect the positive year-to-date performance and the updated tax guidance. We believe the shares offer attractive upside from here.

The company’s share price rose over 7% to 668.50p on today’s positive trading update. Pearson is rated as a four-star stock, which means that it is undervalued relative to its peers, 

North American higher education, the cause of Pearson’s profit warning in 2016, performed reasonably well over the period. Sales declined by just 1%, relative to the 18% fall we witnessed for full-year 2016, with 11% growth in digital courseware - which we estimate at around 56% of the division - offsetting the continued negative impact from print rental and lower enrolments.

Pearson’s previously announced actions, such as slashing the prices of e-books and the piloting of a print rental programme, have had some positive effect, with e-book rentals increasing by 20% over the period, and another 100 titles being added to the 50 already available in the print rental programme.

We are mindful, however, that these programmes remain small in the context of the wider business, and thus are unlikely to move the needle. The rest of the business performed reasonably, with declines in the core business offset by stronger performance in the growth business.

While we are encouraged by today’s update and think this will go some way to restoring investor confidence, we are mindful that many of the issues facing the company are structural in nature. Still, that is not to say they are insurmountable, and fundamentally we believe that Pearson, as the largest educational company worldwide, has the resources at its disposal to rise to the challenge.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Pearson PLC619.80 GBX1.34Rating

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.