A recovery in the share price of academic publisher Pearson (PSON) gathers pace after it posted a solid set of first quarter numbers.
A 3.5% gain to 859.8p takes the advance from its 52-week nadir of 563p to more than 50%. At current levels the shares trade on a consensus 2018 price to earnings ratio of 17.2 times and yield 2.1%.
Flagging a ‘good start’ to 2018, the company posts underlying revenue growth of 1%. In terms of a geographic breakdown North America is up 3%; core markets, including the UK, Australia and Italy, are ahead 6%; and the growth segment, Brazil, China, India and South Africa, fell by 12%.
This big decline in growth markets reflects an unusually big order for the South African business in the first quarter of 2017 which failed to repeat and otherwise these markets would have been ahead by 1%.
Guidance for full year earnings per share of 49p to 53p is maintained. Net debt is down from £1.1bn to £0.6bn year-on-year.
TOO SOON TO BUY INTO RECOVERY?
Pearson has battled reduced appetite among US students for buying expensive academic textbooks. The company has been fighting back, yet Shore Capital analyst Roddy Davidson reckons it is still ‘too early’ to buy into this recovery story and sees the equity valuation as stretched.
He reiterates his ‘hold’ advice and 830p price target and comments: ‘We remain wary on trading conditions in the North American higher education space (which has experienced several “false dawns” and is in our view highly suited to disruptive offerings).’
The analyst also notes execution risk as Pearson continues to negotiate ‘the substantial organisational and cultural change required to realign itself to a digital future’.
Liberum analyst Ian Whittaker, who has been consistently bearish on Pearson, stays at ‘sell’ with a 450p price target. He makes the legitimate point that investors should not read too much into these numbers.
‘Q1 is a relatively small quarter with Pearson’s profits heavily weighted towards the second half,’ he says.
‘Nor does it tend to be a reliable indicator for the full year. For example in Q1 2017, underlying revenue growth was +6% while the full year ended up -2%. For the full year (2018), we forecast a group underlying revenue decline of 3.1%.’
