Education business Pearson (PSON) plunged more than 18% on Thursday after cutting profit guidance in a third quarter trading update.
The share price’s slump takes the stock down to 702.8p, an 18-month low and puts Pearson right at the top of today’s FTSE 100 loser board.
Pearson said that weaker than expected trading in its US higher education courseware business would mean that it expects adjusted operating profit to be at the bottom end of the guidance range, which had been pitched at between £590m to £640m.
DIGITAL SWITCH RAMPS UP
The business represents around 25% of total group revenue and its 10% decline in sales comes as its grapples with the shift from print to digital, which is accelerating faster than expected, the company said.
Pearson now believes that US higher education courseware revenue will fall by something like 8% to 12% in 2019, weaker than the original guidance for a flat to 5% decline.
‘Our data scrape suggests that Pearson has lost share in the fall 2019 academic season, and latest third party industry survey data confirms that students are increasingly skipping paying for materials and shifting to those they can procure for free’, said analysts at investment bank Berenberg today.
Pearson also predicts that adjusted earnings will also come in at the lower end of the previous 57.5p to 63p per share guidance as margins get squeezed.
PROFIT MARGINS UNDER THE COSH
‘Group organic revenue growth may be improving, but not all revenues earn the same margin, and thus we continue to expect the group to miss on profit metrics’ said Berenberg.
It is anticipating a decline in operating profit margins from 10.8% in 2018 to 10.1% for the current full year, implying operating profit to slump from £444m to £393m. Even a forecast bounce in 2020 still leaves the shares exposed, believes Berenberg.
On its 2020 earnings per share estimate of 46.7p, that means the shares are trading on a price to earnings multiple of 15 even after today’s share price collapse.
‘While the stock has underperformed over the past 12 months, despite weakness in the pound sterling, which is beneficial for Pearson, we see further downside potential.’
Berenberg expects the stock to fall to 620p levels over the coming months.
