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Why Pearson's growth targets are overly optimistic

The learning titan struggled in several markets but stood by ambitious growth targets
August 1, 2016

Rising usage of free online courses and learning materials, students opting to rent rather than buy textbooks and flat US college enrolments took their toll on Pearson (PSON) in the reported period. Lower revenue and higher costs drove the education giant's underlying operating profit down four-fifths to £15m, spurring investors to send its shares down 9 per cent on the day.

IC TIP: Sell at 882p

Underlying sales slid 9 per cent in the key North American business, as robust demand from colleges and universities for educational software and online administrative tools was offset by the loss of large assessment contracts in 2015, and the timing of courseware sales and returns. They also fell 6 per cent in the core division, primarily due to falling demand for vocational courses in UK schools. And macroeconomic pressures in China and Brazil halted progress in the growth segment. Pearson's salvation was once again its stake in Penguin Random House, as bestsellers such as Me Before You lifted its cut of the publisher's adjusted operating profit by a quarter to £32m.

Management predicts its restructuring efforts will propel adjusted operating profit north of £800m in 2018. Broker Numis bumped up its forecasts to reflect favourable currency movements; it now expects adjusted pre-tax profit of £565m for the full year, giving EPS of 57.3p (from £677m and 70.3p in 2015).

PEARSON (PSON)
ORD PRICE:882pMARKET VALUE:£7.25bn
TOUCH:881-882p12-MONTH HIGH:1,227pLOW: 645p
DIVIDEND YIELD:5.9%PE RATIO:na
NET ASSET VALUE:786p*NET DEBT:22%

Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20152.00-132-11.318.0
20161.87-306-27.118.0
% change-7---

Ex-div: 18 Aug

Payment: 16 Sep

*Includes intangible assets of £5.62bn, or 684p a share