Pearson - Please write out 100 times "I must do better".

Pearson (PSON.L): Please write out 100 times “I must do better”. In a world full of more and more people, with more and more aspiring to higher educational achievements, being the world’s largest education company is a huge long-term opportunity. The group is now more focused than ever having sold off various activities, culminating in this year’s sale of the FT to Nikkei. Yet all is not well, with today’s nine-month IMS containing a nasty profit warning. They say that their competitive performance remains good, but that problems in the US higher education market and the South African textbook market have hit home. As a result total underlying sales in the third quarter are down 4% underlying, leaving the nine-month run-rate at -2%. At the start of the year their eps guidance for 2015 was 75p-80p (constant currency). That was trimmed to 70p-75p to reflect the effects of the disposals this year including the FT and Economist. They now expect eps to be “around the bottom end of this range”, which many will assume means 68p or 69p. Part of the problem is that education is a secular growth market, but it is surprisingly cyclical as budgets ebb and flow. As we all know, a good part of that problem is that governments change fiscal tack all too often and education is a great political totem for all to meddle with. There is also the tug to be negotiated between new on-line teaching systems and traditional paper/book learning.

They go on to say that net debt was £2.1bn at 30^th September having reached a seasonal peak in June, as reflected in being almost unchanged year-on-year but up on the £1.6bn at the start of the year, when net debt to EBITDA was 1.9x. In the second half they are due to receive most of the Economist proceeds (£469m) and FT (£844m). That will leave the balance sheet in good (some might say flabby?) shape, with the separate disposal statements all saying that proceeds will be retained for various corporate uses. So at the current beaten up 995p, 69p of eps is a PE of 14.x. Despite the lack of eps growth in recent years, the dividend has been nudged forward by 3p each year with cover coming down. That points to 54p for this year and a yield of 5.4%. Looking out to 2016, a small eps pick up to say 72p is a PE of 13.8x and a 57p dividend would be a yield of 5.7%. However, those numbers would be a dividend cover of 1.26x and questions would need to be asked as to whether maintaining a progressive dividend policy was still appropriate, notwithstanding the healthy balance sheet.

Given the huge opportunity in Education, I am itching to knife-catch this stock below 1000p, with a yield over 5%. However, the current lack of underlying growth and a flicker of a dividend question mark makes it difficult to make a compelling buy call. The share price needs a catalyst, be it improved trading or a suitable corporate deal, to re-ignite the enthusiasm. (Neil Cumming^, 21^st October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower