Although shareholders in Pearson plc (LON:PSON) got some respite on Friday with an 12% rally by the educational publisher on fresh restructuring news, City bears remain unconvinced.
Among them, Liberum Capital analyst Ian Whittaker reiterated his stance on Pearson as a ‘key sell’.
In a note to clients, he said: “While there may be a positive reaction to the disposals' announcement, Pearson has admitted in their own words a major driver of the savings is that the US Higher Education market is structurally impacted.”
READ: Pearson leaps as it considers sale of US school courseware business
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He also noted that Pearson's profits “have gone backwards despite their previous £650m+ of cost savings suggesting little confidence the new plan will improve profitability.”
In a trading update ahead of an annual general meeting on Friday - which saw its CEO's pay plan voted down - the FTSE 100-listed group announced a strategic review of its K12 US schools courseware publishing business.
It also said it aims to cut its cost base by £300mln a year by the end of 2019.
But the Liberum analyst concluded: “To us … this looks like the newspapers all over again i.e. continued cost savings and disposals to help shore up profitability while the top-line continually disappoints.”
Back in 2015, Pearson focused itself on educational publishing with the £884mln disposal of the business that owned the Financial Times newspaper to Japan's Nikkei.
Later that year the group also sold its 50% stake in financial news magazine, The Economist.
Analyst cautious on digital challenge facing Pearson
Shore Capital analyst Roddy Davidson also repeated a ‘sell’ rating on Pearson in the wake of Friday’s rally.
He told clients: “Although we see long-term growth in global learning spend as a potentially attractive opportunity for Pearson, we remain cautious on near term trading prospects and on the challenges involved in negotiating the substantial organisational and cultural change required to realign itself to a digital future.”
The analyst added: “This morning’s update provides a degree of comfort on trading (in that it is not a warning), but another raft or reorganisation and repositioning provides further evidence of the complexity of this change process and the strategic review of K12 courseware injects further uncertainty."
Davidson pointed out that his forecasts suggest a sharp decline in Pearson’s earnings per share during the current year, to 48p from 59p in 2016, followed by minimal growth in 2018.
He also expects a substantial reduction in dividends for Pearson shareholders to 21p in 2017 and 2018, down from 52p in 2016, and said he believes “the risk to these expectations remains on the downside.”
Liberum’s Whittaker has a dividend forecast of 22.7p for 2017, falling to 19.8p in 2018. His EPS estimates are 45.3p for this year and 39.5p for next year.