EUR 850.00 For Business Accounts Only

Morningstar | We Upgrade Our FVE for Pearson to GBX 880 but Shares Remain Fairly Valued

Over the past few years, Pearson has experienced almost the perfect storm of negative events: declining university enrolments, an uptick in rental in the higher education courseware market, a loss of testing contracts in the United States, a slowdown in emerging markets, and benign growth in K-12 educational spending. This caused the share price to crater in 2017.Pearson now finds itself at a crucial juncture. Having shed predictable but declining publishing businesses such as the FT and The Economist, Pearson’s portfolio is now focused on the educational sector. As digital learning slowly replaces traditional textbook-based learning, there is a large structural opportunity for Pearson to not only transition to a higher-margin product but also further integrate itself with universities with programs such as "inclusive access," increasing the sustainability of its revenue stream. This strategy is not without risks. As universities shift from traditional textbooks, there is the danger that they may broaden their horizons to digital learning products provided by companies outside the traditional oligopoly in educational publishing. There is also a risk that universities may use the transition to digital learning to demand lower-cost materials, given the high margins that have existed in textbooks for many years. As the largest educational provider globally, Pearson is in an advantageous position. Given its ability to outspend peers, we believe the company will be at the forefront of digital development. The risk surrounding the shift to digital is also mitigated in some regard by the fact that Pearson has been slowly managing the shift to digital for a number of years, and 42% of its business is now digital or at least digitally enabled. Pearson’s ability to manage this and its experience in doing so should prove crucial over the coming years. Although investors need to be aware of the risks brought by the changes taking place in the traditionally stable publishing sector, we believe Pearson is well positioned to capitalise on the structural opportunity that presents itself.