JP Morgan Cazenove has bumped up its price target for Pearson PLC (LON:PSON) after the educational publisher's first quarter results last week.
The new price target is 820p, up from 760p previously, although the broker's recommendation remains neutral.
READ: Pearson up after saying on course to meet expectations as it reports 1% rise in first-quarter underlying revenue
The increased price target reflects foreign exchange fluctuations and changes to the broker's discounted cash flow model.
“We believe the strong share price performance in recent months has been justified by the stabilization of group organic growth, which allows PSON to benefit from cost savings, the potential sale of K12, the weaker GBP, and the prospect of a better business model at the end of what has been / is a painful transition,” Cazenove said.
Underlying trends in the first quarter were in line with management's expectations but not too much should be read into this, Caz cautions, as the first quarter is not a big one for Pearson.
We've released our Q1 trading update this morning. Underlying sales growth +1%. FY18 guidance reiterated. More here https://t.co/jjqNuotJiH
— Pearson plc (@pearsonplc) May 4, 2018
Barclays also warned against going overboard on one quarter's results.
“Pearson's Q1 is full of timing issues, seasonal mix effects and comparison issues, rendering it impossible to pull out an underlying pattern that is a useful predictor of FY progress. Despite this lack of new insights, the shares were up 7% on the day of results. We think investors had been expecting optically weaker Q1 numbers and are now looking ahead to a few months where negative news is unlikely,” Barclays Capital suggested.
BarCap questions whether Pearson can still be regarded as a cheap stock.
Using consensus earnings per share (EPS) forecasts, BarCap notes Pearson's price/earnings ratio has moved from 14.9 times projected 2018 earnings at the start of 2018 to 17.5 times now.
“Looking out to 2020, at the end of the savings plan, Pearson trades on 15.3x P/E on our forecast and 14.5x on company-compiled consensus EPS. In the event that management were to sell the rest of Penguin Random House and apply the same formula to use of proceeds (as for the first part sold), that would be c.10% dilutive to EPS, we estimate, which would move the 2020E P/E to 16.8x (and consensus to 16.0x). That compares to Wolters Kluwer on 16.5x P/E in 2020E - a business we view as more reliable and with better growth prospects,” BarCap continued.
“Admittedly Pearson would have a balance sheet advantage in 2020 in this scenario, but nonetheless we believe the shares are no longer cheap; however, it is hard to see where the next short-term negative catalyst is coming from, and we remain Equal Weight,” it said.
Rather than a price target derived from discounted cash flow, Barclays calculates its 855p price target on a sum of the parts basis; it too has increased the price target because of currency changes, as well as a higher value attributed to Pearson's K-12 courseware and also “modestly higher multiples across the board”.