Publishing giant Pearson (PSON) slips 2.2% to £13.35 following a disappointing third-quarter trading update. Poor US college textbook sales have weighed on the key North American Education business, source of about 50% of the company’s profits.
Having previously said that operating profits would be ‘broadly level’ on 2012, see our previous story, the £11 billion cap has now warned of a lower outcome on last year, even if part of this shortfall is related to a change in the way the company’s share of profits from Penguin Random House are accounted for.
While Pearson is rapidly reinventing itself as a digital business, the pressure on its print products means management has to effect the change quickly or risk an earnings miss. Next week’s (7 Nov) third-quarter trading update from Reed Elsevier (REL) could serve to underline the rival’s more defensible print earnings.
Having outperformed Pearson for the better part of a year, Reed has only tracked Pearson’s performance in the past three months. But signs that trading in Pearson’s core US education print operations are not holding up as well as previously thought could prompt the aforementioned trend to reassert itself.
A £150 million restructuring plan unveiled at Pearson’s finals (25 Feb), the first under new chief executive officer John Fallon, fits into the firm’s wholesale re-angling as a digital business, whether that be selling electronic learning aides to schools or reshaping the Financial Times as an online publication.
However, tough conditions in the company’s core US education end markets are not making matters easy to sell schools new digital learning materials. Budgets are tight so convincing learning institutions to make the upfront investment required to move to digital is even more difficult than getting them to refresh their textbooks. Today’s disappointment relates to college textbook sales where books are sold directly to students but there remains concerns about the schools textbook market given still tough economic conditions in the States.
By contrast the academic journals model of Reed’s key Reed Elsevier division is a subscription model where the competitive pressures are much less and which affords the luxury of time to make the transition to digital.