EUR 850.00 For Business Accounts Only

Morningstar | In-Line 2018, but No End to Market Pressures for Narrow-Moat Pearson

Narrow-moat Pearson updated the market Jan. 16 ahead of its full-year results release next month. The numbers were very much in line with consensus expectations and our forecasts; however, the negative share price move afterward would suggest the market got slightly ahead of itself in its outlook for 2019, which management gave further detail on. Given our already conservative stance on the short- to medium-term prospects for the company, we do not expect to make any material changes to our forecasts on the back of these results. We reiterate our GBX 800 fair value estimate and believe the shares are fully valued.

Management has pulled itself out of the hole it was in two years ago, when sales in Pearson's North American higher education business collapsed under the dual strain of poor selling practices and an upsurge in the book rental market through online players such as Amazon. However, pressures continue not only in North American higher education, in which management has guided to 2019 revenue being flat to down 5%, but also in other areas such as K-12 courseware, eroding the relatively benign growth of around 1% in the rest of the business.

The company is making progress, particularly in the higher education business. Digital penetration is continuing to rise and now represents 55% of sales, while direct-to-consumer sales now represent almost one fourth of overall sales in this business. Both of these actions play to Pearson’s strength, its ability to create and control content, a key contributor to its moat rating. In the meantime, however headwinds abound, limiting the company’s ability to capitalise fully on its leading market position in the short to medium term.