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Should I buy or sell Pearson shares?

by | Last updated 26 Nov, 2022 | Consumer Discretionary

Pearson Plc (LSE:PSON) shares have managed to deliver some respectable performance growing by 49% in the last five years. By comparison, the FTSE 100 index is down by 3% over the same period. And even in 2022, with all the stock market volatility, the educational publisher is still outperforming.

Its shares are listed on the London Stock Exchange, although it does have a dual listing on the New York Stock Exchange under the ticker NYSE:PSO.

Given its relatively strong performance over the years, should I be considering this business for my portfolio today? Let’s explore the company in more detail.

What does Pearson do?

Pearson was founded in 1844 as a construction company in the United Kingdom. But in the 1920s, the company switched to a publishing business model.

Needless to say, that’s quite a radical transition. Yet it seems to have paid off because today, it’s the largest educational publishing company in the world.

Under its current form, Pearson provides educational materials and learning technologies to the government, institutions, universities, high schools, and even corporations. Its range of services includes content creation, test processing, test scoring, and curriculum design.

In 2021, Pearson restructured and now operates through five segments:

  • Assessment and Qualification
  • Virtual Learning
  • English Language Learning
  • Higher Education
  • Workforce Skill

What is Pearson Plc’s financial position?

The group recently published its interim results for 2022. And, in my opinion, they weren’t half bad – an opinion shared by many investors considering Pearson shares surged on the announcement.

Pearson reported an underlying sales growth of 6% to £1.8bn, while gross profit was up 8.7% from £759m to £825m. Adjusted operating profit increased from £33m to £166m, sending adjusted EPS from 10.5p to 22.5p!

This impressive earnings growth was driven by a few factors, including a reduction in restructuring costs, along with net gains from acquisitions and non-core disposals.

Sadly this doesn’t appear to have translated into a stronger balance sheet, with net debt still climbing from £646m to £810m on the back of dividends and its share buyback programme.

Seeing the net debt balance climb during a time of rising interest rates isn’t all that encouraging. But the group seems to still be in a robust financial position. Still, it’s something I’ll be keeping an eye on.

Overall, management has reaffirmed its guidance, signalling internal confidence that operations are on track to hit end-of-year targets.

What is the future of Pearson shares?

Past results are typically a poor indicator of future performance. In other words, just because Pearson stock is performing well today doesn’t mean it will continue rising tomorrow.

That said, I can’t ignore the fact that it’s one of the top-performing UK shares of 2022, with a market capitalisation of £6.4bn trading at a PE ratio of 23.2. Its 52-week range lies between 571p and 932.6p, indicating that Pearson shares are trading closer to the higher end of this scale at their current price of 900p.

With the recent restructuring, the company seems to be positioning itself for further growth. Management plans to drive successful change through targeted investment, acquisitions and divestments.

In the last six months, it was particularly busy with the latter two. Pearson acquired a leading learning platform Mondly, and  Digital Credentialing leader Credly Inc to expand its operations in these high-growth areas. On the flip side, it has almost completed the sale of its International Courseware local publishing business. 

Furthermore, there is an ongoing strategic review of the company’s online programme management business. If successful, it could make Pearson’s future financial performance stronger.

With that in mind, it’s not surprising that the general consensus from analysts is a “buy” recommendation with an average price target of 902p. Although not everyone is as optimistic, with some forecasts predicting Pearson shares could fall as low as 520p should it fail to live up to expectations.

What are some of the risk factors?

Before making any investment decision, it’s critical to explore the threats a company has to contend with. And despite its strong display, Pearson shares are far from a risk-free investment.

To start things off, the education market is highly competitive. Today, EdTech platforms like Udemy and Coursera are rapidly gaining traction and stealing market share. While they remain a small operation compared to Pearson, their small size provides them with a more agile approach to doing business to outmanoeuvre the company.

Pearson has so far proven to be reasonably resilient to the rising competitive pressures. However, this won’t remain the case if it can’t continue to attract and retain high-quality talent to create its educational materials.

While that may not seem likely, any slip-up in product quality could lead to the loss of accreditations which, in turn, may obliterate its public-institution-facing contracts. This is obviously the worst-case scenario. But if it were to occur, the Pearson share price could be in for quite the tumble.

Is it good to invest in Pearson shares?

Before investing, I like to check how much of the company is owned by insiders and institutions. Institutional investors own over 50% of the company, while insiders own less than 1%. I check these factors because it gives me added credibility to the company’s business. 

For an income investor, Pearson also pays dividends. And the board recently declared an interim dividend of 6.6p per share in July 2022.

All things considered, Pearson shares look like a good investment in my eyes. While there are some factors that require careful monitoring, I believe the long-term potential returns far outweigh the risks. That’s why I’m considering this business for my portfolio today.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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