Pearson may have learned his toughest lessons

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Pearson Plc is the wayward student with a tendency to overpromise, showing brief spurts of improvement only to bring home a disappointing report card bearing the words ‘must try harder’. The education provider and textbook publisher is in the midst of another periodic rally, and markets seem willing to believe the top ratings are here to stay. Maybe it deserves the benefit of the doubt this time.

Somehow, Pearson seems destined to earn a place in the annals of corporate reinvention after former CEO John Fallon bet the ranch on transforming the media conglomerate into a targeted education provider. digital. He sold legendary assets such as the Financial Times (which his predecessor, Marjorie Scardino, swore would be sold “on my dead body”), a half-share in The Economist Group and Penguin Books. It was a torturous transition from the start, marked by successive restructurings and job cuts, waves of mergers and acquisitions, a series of profit warnings and a shareholder revolt over CEO pay.

Fallon’s successor, former Walt Disney Co. executive Andy Bird, took over two years ago and has largely followed the same strategy, accelerating the push toward online learning with Pearson+, an online learning service. direct-to-consumer subscription for college students whose name echoes the Disney+ Streaming Service. On Monday, the London-based company reported nine-month sales growth of 7% (led by a 28% rise in its English language learning unit), forecast operating profit above consensus estimates and increased its dividend by 5%. The stock rose 8.7% to its highest level in more than three years (although it gave up some of those gains in Tuesday’s trading).

Pearson is entitled to feel some vindication. In March, the company said it had rejected two offers from private equity firm Apollo Global Management Inc. at 800p and 854.2p per share, arguing they “significantly undervalued” the company. Shares tumbled in response (having risen in anticipation of a possible takeover), but at 976 pence at Monday’s close, they are well above either bid. With a market capitalization of over $7.5 billion, Pearson no longer presents such a tempting target for an acquirer. A gaping valuation gap with Relx Plc, the academic publisher to which the company is often compared, has been halved. Pearson trades at a multiple of 12.3 times enterprise value to estimated earnings before interest, taxes, depreciation and amortization, compared to 16.8 for Relx. In early March, those numbers were 8.5 and 16.1.

Some fund managers marked by more than one false dawn may remain wary. Once a darling of the FTSE-100 index, Pearson lost more than a quarter of its market value in one day in 2017 after a negative earnings review contrasted with months of upbeat statements from Fallon. At the start of 2019, it ranked as the lowest-rated stock on the FTSE index by analysts. This year, since Tuesday, it is the best performing stock of the 100 on the FTSE.

Despite all the tribulations of the past decade, there is an argument that the decision to focus on the education sector was always a wise one. Just because the company suffered setbacks and gave up assets that in themselves still held promise doesn’t mean the case is invalid. Staying put was not an option against the tsunami of digitalization and e-learning. Good strategy is often a matter of making hard choices, focusing limited resources on areas that offer the best opportunities and where a company can make the most of its competitive advantage.

To some extent, Pearson owed its problems to factors beyond its control, such as declining college enrollment rates in the United States, a market that accounts for a quarter of sales. Where the company can be criticized is that it hasn’t moved quickly enough to capitalize on trends such as online delivery of college textbooks and second-hand rentals, which have undermined business. once extremely profitable printing. It’s a failure of execution rather than vision, however. Education still represents a vast opportunity: a $5 trillion market that is expected to grow to $7 trillion by 2030, according to Pearson’s latest annual report.

While some of Pearson’s difficulties are due to bad luck, time and chance can also work the other way around. The pandemic has accelerated the shift to online learning. Fortuitously, the company also has desirable Brexit-proof attributes, being a services exporter that derives most of its revenue from overseas and therefore benefits from the weak pound. Every 1 cent movement in the dollar-pound exchange rate is equivalent to £3 million in adjusted operating profit, chief financial officer Sally Johnson said during Monday’s earnings call.

All is not blue sky. Sales in Pearson’s higher education segment, its second largest accounting for a quarter of revenue last year, are still down: down 4% in the first nine months. The exchange rate could change direction, now that the markets have seen the back of Liz Truss. The company deserves a solid B at the moment, however. “Keep going” are now the watchwords.