Analysts are asking whether Pearson?s (PSON) relative outperformance over the past couple of days versus FTSE 100 publishing peer Reed Elsevier (REL) can be sustained. Pearson leapt 7.1% today to £13.36 on the back of a reassuring half-year report.
David Reynolds at Jefferies International flags Pearson?s 33% first-half decline in adjusted earnings per share versus an equivalent 9% advance reported by Reed at its interims yesterday (25 Jul). He then asks if the latter?s 4.3% premium, based on a prospective price/earnings (PE) ratio of 14.6 using 2014 earnings forecasts against Pearson?s 14.0, adequately reflects its superior earnings growth potential.
Reed?s 31% year-to-date rally versus an equivalent 12.9% gain in Pearson disguises a reversal in relative fortunes between the two since Reed unveiled its interims. Since Reed published its numbers it has advanced 5% while Pearson is up 6.4%, but Reynolds' analysis suggests this reversal does not represent the start of a new trend and will prove only temporary.
Reed, one of Shares' key selections for 2013 (see Cover 27 Dec '12), has put in a strong relative performance since last year's low of 469.4p (1 Jun '12), as the chart shows. But this has yet to undo ten years of relative share price underperformance versus Pearson. On an enterprise value basis Reed is at an even greater premium of about 20% to Pearson than the PEs would suggest, but even a 20% premium might not reflect its relative growth attractions.
Reynolds points out that not much can be inferred from Pearson's interims in terms of the full-year numbers given that it generates 'less than 20% of full-year adjusted EPS in H1, so the numbers are not that insightful'. He points to the company's North American division as a key weakness. Pressure on Pearson's US kindergarten-to-Year 12 textbook business prompted earnings downgrades at the first-quarter trading update (26 Apr) although forecasts were not cut today.
