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Pearson worth persevering with, Goldman Sachs says

Pearson worth persevering with, Goldman Sachs says

Financial Times and Penguin books owner Pearson (LON:PSON) is mostly friendless this morning after a downbeat trading update, but Goldman Sachs is staying loyal.

It reiterated its ‘buy’ recommendation and urged its clients to ignore short-term headwinds and focus on the long-term attractions.

The US investment bank expects earnings per share (EPS) to be flat year-on-year (yoy) in 2013 but should kick on in 2014, driven by cost synergies from the Penguin joint venture (JV) with Random House and the contribution of acquisitions made last year, such as Embanet.

In Goldman Sachs’s scenario, 2014 EPS should rise 18% from 2013’s level.

“We believe that the market will start looking to 2014 once Pearson reports its final results in February. Clarity on restructuring costs should help narrow a wide consensus EPS range. In the short term, potential asset disposals from within the FT Group could be enhancing if accompanied by a capital return. We believe that Pearson will continue to outperform its peers in College, especially as Cengage (the number 2 player) reported a c.20% yoy drop in sales at 3Q and has net debt/EBITDA of 7.7x. The Schools market is likely to be boosted by the Common Curriculum,” Goldman Sachs said.

The bank argues that Pearson has more attractive longer-term growth potential than fellow publisher Reed Elsevier (LON:REL) and yet trades on similar multiples.

“Our 12-month price target of 1,510p (unchanged) is based on 15x 2014 P/E [price/earnings], implying 22% upside. We see scope for a re-rating as Pearson’s organic growth improves and the market starts to focus on its longer-term strategy,” the bank’s number crunchers conclude.

Shares in Pearson were down 40p to 1,198p in mid-morning trade, after revealing it will report flat profits this year after tough trading in the final quarter, which it cautioned is set to continue into 2013.

John Harrington
John Harrington

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