Educational publisher Pearson PLC (LON:PSON) is pulling out all the stops on the cost-savings front to stay on course to meet full-year expectations.
Customers have been running down high stock levels, the company warned, and this has been hitting sales, which were down 7% year-on-year in underlying terms in the first nine months of the year, unchanged from the performance level at the half-way point of the year.
Sales declined 3% in headline terms, due to the strength of the dollar against sterling, but were off 10% on a constant exchange rates basis. Morgan Stanley had forecast headline sales to decline by 5% year-on-year, versus a decline of 5% at the halfway stage.
The company said it would stick by its 2016 guidance figures, even though its markets have been challenging, with sales in the North American Higher Education courseware business trending lower than management’s expectations.
The company has been managing discretionary costs tightly, while sterling’s weakness, if it persists, will put a bit of lipstick on the full-year numbers.
The group said it continues to expect to report full-year adjusted earnings per share (EPS) before restructuring costs of between 50p and 55p, but if current exchange rate levels persist then a boost of around 4.5p could be expected to EPS.
"Our competitive performance remains strong in a tough market. We have achieved more than 90% of the growth and simplification restructuring programme we announced in January,” said Pearson’s chief executive, John Fallon.
"While market conditions continue to be challenging, particularly in higher education, thanks to tight cost management we are on track to deliver our guidance this year, and to achieve our long term growth goal," he added.
Market reaction to the trading update was mostly negative, contributing to a 10.9% slump in the share price in the morning session to 741.91p.
“It’s worrying that the company has failed to find a more stable sales base in its education division given that it is now almost solely reliant on that sector after offloading of its major media outlets,” opined Connor Campbell at spread betting firm Spreadex.
“Must do better,” was the verdict of Hargreaves Lansdown (HL).
“Having sold off The Economist and The Financial Times, Pearson is now relying on its core educational businesses for forward momentum, but convincing customers to continue paying for its content represents a huge challenge to the group against a backdrop of free educational resources popping up online,” observed HL equity analyst George Salmon.
“Despite enjoying the benefits of a weaker pound, sales have been falling recently and there was little in today’s update to suggest that the tide is changing.
“Costs are being taken out as the group restructures, and with the proceeds from its recent disposals in the bank, Pearson says the dividend is safe for the time being. For the group to avoid a cut in the longer-term, however, things will need to improve,” Salmon suggested.
Graham Spooner, an investment research analyst at The Share Centre, said the publisher tried to reassure investors, but when you did a little deeper, the numbers were sluggish, with underlying sales down 7% year-on-year.
The reason cited for this sales fall was the group continuing to see pressures on its US educational business, but Spooner noted the group had seen better sales trends in September, which continued into October.
“The shares could well be a classic value trap and we would put off potential new investors attracted by the circa 6% yield. We therefore recommend Pearson as no more than a weak ‘hold’ at current levels, as management implement changes to the group, aimed at reducing costs and streamlining parts of the business,” Spooner said.
Liberum wasted little time in reiterating its ‘sell’ recommendation ahead of this morning’s investor conference call and was equally scathing following it, saying the conference would have raised more questions than it answered.
“Q4 [fourth quarter] underlying revenues are unlikely to recover from the 9 months’ -7%, suggesting a much weaker 2H [second half] than guided to at 1H; their attempt to put the blame for US Higher Education weakness on bookstores’ changing buying patterns were not convincing; they are still clinging to guidance of £800mln adjusted operating profit, despite admitting it will exit 2016 with a lower revenue base than anticipated; and their explanations as to why things will get better sound unconvincing,” the broker said.
Liberum drew an analogy with Pearson’s predicament and that of the newspapers, which are seeing declining sales but meeting earnings numbers by cutting costs.
“There is a serious risk here of a de-rating of the stock as investors realise that there is a limit to cost cutting (as even management admitted) and that, unless underlying top-line revenues see an improvement in the top-line performance, Pearson will resemble more and more the newspaper stocks,” the broker said.