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Pearson downgraded by Berenberg on US college admissions risks

Published: 11:42 27 May 2020 BST

Pearson PLC -
Empty lecture theatres spells bad news for Pearson

Pearson PLC (LON:PSON) faces a tough autumn as college enrolments are expected to drop sharply this year, leading Berenberg analysts to downgrade their rating on the shares.

The analysts now assume a 10% decline in student enrolment for the coming academic year, with risks that the fall could even be worse, based on recently published surveys showing that students do not want a virtual experience in place of campus in-person education.

READ: Pearson pays out dividend as coronavirus rebalances sales towards digital

“Meanwhile, severe economic disruption will make it harder for many students to even afford college,” the analysts said in a note to clients on Wednesday. 

“Those that can afford it will doubtless look even harder for lower-priced courseware materials, which could also accelerate the decline in Pearson’s courseware revenue per student.”

Berenberg now forecasts a 15.8% reduction in US college courseware revenue in 2020, down from the 11.3% decrease previously predicted.

Looking to the next few years, the bank does not think that online learning is likely to become the norm. 

“While some may argue that Pearson will benefit from the enforced shift to online education, we disagree. 

“We think home schooling highlights the importance of social interaction and, while parents have mainly had to stay at home, when the world returns ‘to normal’, parents will need to go back to work, making home schooling inconvenient.”

What’s more, the analysts do not believe that the fully bundled Pearson offering is suitable for colleges looking for a short-term online fix and that a revenue-sharing model “makes no sense for colleges that gain, in the longer term, from the failure of smaller institutions”. 

Other unhelpful trends were also identified, with a decision by the University of California to phase out the SAT and ACTs tests that “may spell the end of standardised testing for college entrance”, another business to which Pearson is exposed, while the falling US birth rate is expected to translate into a declining number of university students in the second half of this decade.

The bank downgraded its rating to ‘sell’ from ‘hold’, with the share price target cut to 400p from 450p.

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