EUR 850.00 For Business Accounts Only

Morningstar | PSON Updated Forecasts and Estimates from 27 Sep 2018

Narrow-moat Pearson published a decent set of first-half results with underlying revenue growth of 2% across the business and a marked improvement in EPS year over year. While it is always difficult to take much from these results, given how back-end-loaded Pearson’s year is, we believe the company is on track to meet our full-year expectations. As such, we do not expect to make any material changes to our forecasts or to our GBX 800 fair value estimate, and we believe the shares are currently fairly valued.

Divisionally, performance was quite mixed. North America, which generates two thirds of group revenue, saw revenue rise by 3% on an underlying basis over the period. This was a welcome return to growth following last year’s decline on the back of issues within the higher-education business. However, the company did warn in its statement that the North America higher-education business will continue to see a decline in net sales this year, as pressures have not dissipated completely. In Pearson’s core business, revenue rose by 2% over the period, a slight improvement on full-year 2017, primarily due to a better performance in clinical assessment and testing. Lastly, the growth division witnessed revenue declines of 4% in the first half against tough comparatives, with South African school courseware declines preannounced.

While investors may take these results as tangible proof of management’s successful implementation of their turnaround strategy, it is clear that the business is still facing pressures across numerous businesses and is not yet out of the woods. Ultimately Pearson generates and owns the content it sells, which is the basis for its narrow moat rating; however, we are mindful of the risk/reward equation, and at this point in time we believe the market is not offering “a fat pitch”.