Marked down

Pearson has to sell investors on recovery story

Pearson has to sell investors on its recovery story. A month after a 2013 profit warning, the educational publishing giant has shocked shareholders again by cautioning that this year's earnings will suffer too. With the group's business model in flux, new-ish Chief Executive John Fallon has yet to convince the market the problems are temporary.

The latest letdown means Pearson has shed roughly a quarter of its market capitalisation since the start of the year. It now expects 62 to 67 pence of earnings per share in 2014: a roughly 13 per cent downgrade versus consensus, according to Jefferies.

The culprits include a stronger pound, since Pearson's earnings are largely in dollars, and earnings-diluting disposals. US colleges are likely to welcome fewer students again, and the switch to new school curriculums on both sides of the Atlantic will depress sales to younger learners.

The company, which also owns the Financial Times and 47 per cent of the recently merged Penguin Random House, has already made big strides in cutting its reliance on physical textbooks. It sees a brighter future based on English-learners in emerging markets, and digital classrooms. So Fallon is keen to emphasise that headaches with enrolments, new curriculums and so on should not last.

At least the new valuation is harder to challenge. A share price of roughly 10 pounds equates to 14.9 to 16.1 times earnings on Pearson's own forecasts, and a dividend yield of 4.8 per cent for 2013. That is marginally pricier than WPP, say, but with a much higher yield.

Yet the market is dubious. Some investors worry that new players could undercut Pearson in the digital world, and that the remaining textbook business will fall away faster than expected. The uncertainty is reflected in widely diverging analyst estimates. Even before the Feb. 28 surprise, the most positive had a price target 73 per cent above the most gloomy, Datastream shows. Over the last 10 years the gulf averaged 46 per cent. If Fallon can show this is a soft patch not an existential challenge, he should be able to narrow that gap.