Shares in the world’s number one educational publisher Pearson (PSON) gained 7% to a new three-month high of 939p after the company reported strong growth in first-half operating profits and raised its full year earnings per share (EPS) guidance.
Operating profits grew by 32% on an underlying basis in the first half, therefore the firm has raised its full year adjusted EPS guidance to between 57.5p and 63p against its previous estimate of 53.5p to 59p.
The new forecast is not only comfortably above the consensus of analysts’ estimates for this year (56p) but the top end of the range is also above the mean estimate for 2020 (59.5p).
As in previous years, Pearson expects sales and profits to be weighted towards the second half.
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The company put its improved performance down to ‘continued momentum in our structural growth opportunities’ such as enrolment in its Online Program Management (OMP) which grew by 13% in the first half and its Connections Academy with enrolment growing by 11% across existing schools and new schools.
Pearson is in the middle of a huge transformation from selling printed textbooks to becoming a ‘digital-first’ business where customers pay a subscription and receive updates electronically.
This is much the same process as Microsoft has undergone in the last five years as it transformed itself into a cloud-based software business, as we explained here.
These transformations can often mean a dip in traditional revenues as users switch from paying up-front for a product to paying monthly.
In Pearson’s case the decline in revenues from its US Higher Education Courseware and US Student Assessment programmes is being offset first by growth in its OPM offering and second by a ramp-up in contracts in its Professional Certification business and strong test volumes in its Test of English Academic offering in India and China.
The company claims that by simplifying its business it can deliver over £330m of annualised cost saving by the end of this year, but the bigger issue for investors is whether it can grow again.
Along with its raised earnings guidance the firm said that after five years of falling sales it expects to ‘stabilise revenue in 2019 and return to top line growth in 2020’.
