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Pearson on verge of FTSE 100 drop as profits fall short

The educational publisher saw adjusted operating profits rise 6%, while statutory operating profits fell 50%

Pearson PLC -
US higher education has been Pearson's big problem

Pearson PLC (LON:PSON) saw its shares fall on Friday, putting the educational publisher at risk of dropping out of the FTSE 100 index in next month's reshuffle.

The group, which issued a profit warning just last month, lowered its 2020 outlook once again as it revealed that its full-year 2019 results had missed expectations.

READ: Pearson underwhelms again as US arm struggles

Pearson posted an adjusted operating profit of £581mln for 2019, up 6% on the year before but short of the “circa £590mln” it had indicated in January.

On a statutory basis, Pearson's sales decreased by 6% to £3.9bn as US higher education courseware revenues tumbled and the disposal of its stake in Penguin Random House partially offset helpful currency movements. 

Statutory operating profits dropped 50% to £275mln, reflecting lower sales and higher restructuring and amortisation charges.

Pearson reported that underlying sales at its ‘Core’ segment grew 5%, with the ‘Growth’ segment up 4%, but that was offset by a 3% decline in North America, with US Higher Education Courseware dropping 12%.

The group said the outlook for 2020 is now for an operating profit of £410mln-490mln, down from January's guidance of £500mln-580mln, although it added that this is because the stake in Penguin Random House is now being excluded. 

US Higher Education Courseware is expected to see “heavy declines” in printed text “partially offset by modest growth in digital”, with the rest of the group growing at an aggregate “low single-digit” rate.

However, outgoing chief executive John Fallon said Pearson was now "well placed, in time, to grow in a profitable and sustainable way" as 76% of the company was growing strongly, and "all parts" of the business are profitable.

Share down; brokers cautious

Pearson shares were down 4% to 558.4p by noon on Friday, giving it a market cap of less than £4.3bn that is the second smallest on the blue chip index and eclipsed by around a dozen FTSE 250 companies.

Index operator FTSE Russell's market capitalisation cut-off date for the next quarterly review will take place at close of business on Tuesday 3 March.

Analysts at UBS said the most noteworthy news was that Pearson's businesses outside US higher education courseware delivered underlying revenue growth of 4%.

The "main negative" was that net debt was higher than expected at just over £1bn, though this was driven by the timing of incentive payments and cash outflows from US K-12 Courseware prior to disposal, the Swiss bank's analysts said. 

Over at City broker Liberum capital, its analysts said that while Pearson stated that 74% of the group grew at 4%, "we find it difficult to reconcile these stated areas of growth to the reported P&L". 

They added that their "main concern is that this poor performance was driven predominantly by cost savings, and we believe that the group is running out of road and further cost savings may begin to impact top-line growth".

   --Adds share price, broker comment--

Quick facts: Pearson PLC

Price: 569.8 GBX

Market: LSE
Market Cap: £42.87 m

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