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US education fuels Pearson concern

Demand for the group's textbooks and assessments are falling in US schools
February 24, 2017

Pearson's (PSON) major profit warning in January may have shielded investors from the shock in these full-year numbers, but that didn't make the results any less woeful. Excluding favourable currency movements and the year-on-year impact of disposals, underlying sales fell 8 per cent. Adjusted operating profits were down by a fifth, while major impairments taken on intangible assets widened reported losses and earnings.

IC TIP: Sell at 629p

To some extent, the group's problems can be explained by a poor education resources market. Pearson still makes half its US revenues from print, and squeezed demand amid the rise in digital education sent sales in the higher education business down 18 per cent.

In the US, Pearson's approach to education and receipt of tax-funded education finances haven't made it particularly popular, resulting in fewer contracts to supply US schools with textbooks and assessment material last year. The group also cited government regulatory changes as one of the reasons for difficulties in its US and UK higher education businesses. Both of these divisions reported double-digit revenue declines in 2016.

Broker Numis has forecast EPS for the year to December 2017 of 49.6p (down from 58.8 in FY2016). With management planning on cutting the dividend to better reflect EPS, investors can expect a much depleted 22p payout this year based on these forecasts.

PEARSON (PSON)

ORD PRICE:629pMARKET VALUE:£5.17bn
TOUCH:628.5-629.5p12-MONTH HIGH / LOW:990p552p
DIVIDEND YIELD:8.3%PE RATIO:NA
NET ASSET VALUE:528p*NET DEBT25%

Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20124.960.3938.745.0
20135.070.3836.448.0
2014 (restated)4.540.2624.751.0
20154.47-0.43-43.352.0
20164.55-2.56-28752.0
% change+2---

Ex-div: tbc

Payment: tbc

*Includes intangible assets of £3.4bn, or 418p a share