EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Pearson Follows the Course in 1Q

Narrow-moat Pearson produced a set of first-quarter numbers slightly above our full-year expectations with underlying revenue growth of 2%. But with the big selling period coming later in the year--at least, for North American higher education--there is the potential for further twists and turns in the story. As such, we maintain our forecasts and GBX 880 fair value estimate. We believe the shares are currently up with events.

Divisionally, growth was not quite in the pattern we expected. North America, which in higher education is still struggling with the dual headwinds of lower college enrollments and the pressure from rental books, delivered top-line growth of 2%. Likewise, the core business, in which revenue has not been in positive territory on a full year basis since 2013, saw growth of 4%. Conversely, the growth segment saw revenue flat year over year, although much of this was down to the timing of orders in key regions.

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