It has been a mixed day on the broker front for struggling publishing group Pearson plc (LON:PSON).
Analysts at Exane BNP Paribas issued a ‘sell’ note on the FTSE 100 company as it thinks structural challenges in the education publishing sector – which is where Pearson is focusing its efforts – will make life difficult.
READ: Pearson sells Global Education business to Chinese firm Puxin for around US$80mln
Research analyst Chris Collett reckons the increasing costs of going to university or college and the rise of non-degree courses such as apprenticeships means fewer people will enter higher education in the coming years.
“Pearson does not disclose the profitability of the higher education courseware business, but we estimate it at c.£190m, making it the largest single profit contributor and representing nearly 40% of group operating profit,” wrote Collett in a note.
“The challenge is that we think the business will continue to decline in 2018, losing c.US$70m/£55m of highly profitable revenues every year over 2018 – 2020.”
Poor divi returns
He also slams the “meagre” dividend which Pearson was forced to rebase earlier this year.
That said, Collett expects Pearson to narrowly avoid a profit warning this year, partly because it has already set its forecasts pretty low, although he does expect pressure to continue to mount.
On top of the rating downgrade, he also lowered his price target to 470p, which implies 20% downside.
Exane much more upbeat
At the opposite end of the scale was Exane BNP Paribas, which upgraded Pearson to ‘outperform’ and was the reason shares were higher in mid-morning trade.
In contrast to what Collett had to say, Exane analyst Sami Kassab reckons the US higher education publishing market “returned to stability” over summer which should bode well for the third quarter results.
Kassab had expected sales from this business to fall by 7% over the year but he now expects them to come in flat.
Strategy coming along nicely, good entry point
He adds that Pearson is “making good progress” with its turnaround strategy and that the stock is relatively cheap given the sell-off this year.
“Expectations are running low,” says Kassab.
“The stock trades on EV/EBIT18 of 9.5x, close to its 10 year lows and below its peers.
“The structural risks – with Open Education Resources the main one – and the difficulty to forecast certainly justify a discount, but we think the current share price offers a good entry point.”
As well as the upgrade, Kassab hiked the price target by 17% to 700p.
Pearson shares were up 2.5% to 598p in mid-morning trade.