Liberum analyst Ian Whittaker remains highly bearish on academic publisher Pearson (PSON) reiterating his 'sell' recommendation and 470p price target after weak numbers from American peer Cengage Learning.
Pearson, up 0.7% to 754p, faces structural issues in its key US education market which have resulted in a string of profit warnings. Essentially students are buying less expensive textbooks. In its fiscal second quarter Cengage saw its own profit fall 9.5%.
Whittaker's key takeaway is that the US Higher Education market is more important to Pearson than the market thinks.
'Given Pearson is a larger player than Cengage in the US Higher Education market (its market share is c.40% of the market), it would be expected that Pearson should be able to leverage scale benefits to generate higher margins.
'This suggests that consensus views that Pearson's US Higher Education share of group profits broadly tracks its revenue share (at around a third) is too low; we think US Higher Education is closer to 45% of Pearson's profits thus showing its importance to the group.'
The company is next expected to update the market in January 2017. We explained why the company could be headed for another profit warning after disappointing third quarter numbers (17 Oct).
