Share of the Week: Investors chase this dog higher

Is education publisher Pearson (PSON) on the path to recovery, or will this week’s 9.5% rise prove to be a false dawn?

Ignoring all that had happened prior to 2017, which included multiple profits warnings, the stock was languishing at 634p this time last week – 22% down year-to-date.

The past four days have been much better, though.The share price has just broken above the two-year downtrend (see chart below), a technical move which often indicates further upside to come.

Pearson shares are currently approaching the £7 mark, not far off early May levels. That’s because management was able to appease the market by unveiling “good progress” in the first nine months of the year.

Underlying revenue fell by 2% compared to the first nine months of 2016, with sales at its US higher education business declining by 1%. It added that the underlying structural pressures in the US textbook market is likely to persist over the medium term. So far, not sounding great.

However, the latter figure was towards the upper end of the firm’s lowered guidance figures. Profits will also benefit from Pearson’s 2016 restructuring programme, we’re told, underpinning confidence in the full year.

Guidance for the 12 months has now been narrowed towards the upper range. Adjusted operating profit will now be at least £576 million, from £546 million before. Adjusted earnings per share (EPS) will be 51-54p, rather than 45.5-52.5p previously.

It also spoke of a “strong balance sheet”, with net debt at the end of September standing at £1.32 billion, 4% below that of the previous year. Pearson tells us this reflects “good operating cash generation, a lower interim dividend payment and a modest [foreign exchange] benefit”.

A £300 million share buyback scheme will be financed by proceeds from the sale of its 22% stake in Penguin Random House.

“We continue to invest in growing market opportunities, gaining share with our digital transformation, and becoming simpler and more efficient,” said chief executive John Fallon.

The Financial Times also broke news Friday that the firm is in talks with Asian private equity houses to sell its English-language school unit for more than $350 million (£265 million). This would represent a $110 million profit on its 2009-10 purchase price.

While the market may have been impressed, broker and long-time bear Liberum was not. Analyst Ian Whittaker argues that the new editions cycle that has boosted Pearson this year will create a hangover effect for 2018 and 2019, two years which will see fewer new editions.

Whittaker also doesn’t think the cycle will be as positive for Pearson as it was in 2014. “As such, we think Pearson is still vulnerable to a Q4 shock in its most important area of business.” He reiterates his ‘sell’ rating and 330p target price. Ouch!

Things may be looking up for Pearson right now, but it’s been a basket case for years. Our Dogs of the Footsie strategy is certainly hoping this will be the turnaround shareholders are praying for, but we’ll need to see more evidence before taking a second glance.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.