Digital revamp pays off for Pearson

Education group Pearson (PSON) expects to increase its adjusted operating profit by 28 per cent this year to £585mn, following a strong performance in 2022. The positive outlook seems to vindicate the dazzling rise of Pearson’s shares last year, which put the company among the FTSE 100’s top performers. 

It’s worth keeping a close eye on the performance of the group’s different divisions, however. Management thinks that its workforce skills business – which is currently small and loss-making – will be key to the group’s success between now and 2025, with sales growth expected to exceed 20 per cent on a compound annual growth rate basis. Management has invested heavily in this side of the company, buying a workforce AI company in 2021 and a digital workforce credentialing group in 2022. 

In contrast, Pearson’s higher education business – which generates about a quarter of group sales – is on a downward trajectory. Sales fell by 4 per cent in 2022, driven by a decline in US college enrolments and loss of business to non-mainstream publishers, including open educational resources. Things are expected to remain difficult next year: while margins are forecast to rise, revenue is expected to decline between now and 2025. Analysts have identified concerns about the growing cost of education in the US, and a rising perception that the value of a college degree isn't as valuable as once thought. 

It’s a similar story at Pearson's virtual learning business, which generates about a fifth of group sales. Virtual school enrolment declined this year as the Covid-effect unwound, and revenue is expected to decline going forwards. Meanwhile, the ‘online programme management’ side of things has long been a drag on the group’s overall performance. 

The conundrum for investors is whether Pearson’s stronger divisions, combined with efforts to widen margins, are enough to counterbalance the declines elsewhere, or whether Pearson will be locked in a perpetual cycle of expensive re-thinks. It’s important to note that restructuring costs are still having a major impact on Pearson’s profitability. While adjusted operating profit reached £456mn in 2022, the statutory figure sat at just £271mn. This discrepancy was largely the result of £150mn of restructuring costs, including staff redundancies and impairment of right of use property assets. 

Pearson is trading on a forward price-to-earnings ratio of 16, which isn't hugely expensive and is in-line with its five-year average. Given the publisher's patchy track record, however,  and the fact that its workplace skills business is still in its infancy, we are inclined to be cautious. Hold. 

Last IC View: Hold, 811p, 4 Aug 2022